Good morning, and welcome to the Molson Coors Beverage Company second quarter fiscal year 2025 earnings conference call. With that, I'll hand it over to Tracy Mangini, Vice President, Investor Relations. Thank you, Operator, and hello, everyone.

Our discussion today includes forward-looking statements within the meaning of U.S. federal securities laws. For more information, please refer to the forward-looking statements disclosure in our earnings release. In addition, the definitions of, or reconciliations for, any non-US GAAP measures are included in our earnings release. Given our quarterly performance, including financial and operational metrics and drivers, is detailed in our earnings release and earnings slides, which were made available earlier today on the IR section of our website, we will focus our prepared remarks on what we believe is top of mind for you, and that is the industry, how we're responding, capital allocation, and our financial outlook. and please note that given the current environment we are providing a more detailed than typical review of our 2025 guidance drivers we will then take your questions and as always we ask that you limit yourself to one question and then if needed return to the queue with that i'll pass it over to you gavin thank you tracy hello everybody and thank you for joining the call during the second quarter

we continue to execute against our strategic plans to support our long-term growth objectives and to return cash to shareholders while navigating a challenging and volatile macro environment. As a result of the uncertainty around the effects of geopolitical events and global trade and immigration policies, consumer sentiment in the U.S. has remained at relatively low historical levels. This has continued to pressure consumption trends. These macro impacts in the U.S. have had a disproportionate effect on the lower income and Hispanic consumer, and within beer, these consumer segments have driven a reduction in the number of buyers, as well as spend, with a shift to singles in the second quarter. In addition, while less impactful, certain regions of the U.S. experienced some severe weather conditions during the quarter, which had a notable impact on the important Memorial Day weekend. These factors have resulted in a much softer U.S. beer industry so far this year than we had previously expected. Recall our guidance issued on May the 8th that assumed the U.S. industry would improve for the balance of the year, from down approximately 5% in the first quarter to levels closer to that of the last several years, which averaged down around 3%. But in the second quarter, the industry continued to be down around 5%. Further, the Midwest premium pricing, which is a component of our aluminum cost, has been indirectly impacted by recent US tariff announcements, causing another substantial and unexpected spike in the second quarter. For perspective, and as you can clearly see on slide 19 of our earnings deck, in July, the Midwest premium jumped to 68 cents per pound, an increase of over 180% since January. As a result of these macro drivers, and to a lesser degree lower than expected share performance we are reducing our top and bottom line guidance for 2025. We now expect net sales revenue to decline three to four percent on a constant currency basis as compared to a low single-digit decline previously. The range assumes U.S. industry volume will decline between four and six percent for the second half of the year. We now expect underlying pre-tax income to decline 12% to 15% on a constant currency basis, as compared to a low single-digit decline previously. The range includes, for the second half of the year, incremental costs specific to the Midwest premium of $20 to $35 million, which assumes a respective price per pound of $0.60 to $0.75. cents this is partly offset by lower expected incentive compensation given the change in outlook as a result we now expect underlying earnings per share to decline seven to ten percent as compared to low single digits growth however we are reaffirming our underlying free cash flow guidance of 1.3 billion dollars plus or minus 10 percent as we expect higher cash tax benefits and favorable working capital to offset the guidance decline for underlying pre-tax income. Now, Tracy will speak to our guidance in more detail in a moment. But first, I want to stress that we continue to view the incremental softness in the industry performance this year as cyclical, driven by the macroeconomic environment. And this belief, in our view, is clearly demonstrated by the execution of our share repurchase program, well ahead of our original expectations. While U.S. consumer basket sizes are smaller in the current environment, the percent of alcohol in those baskets has remained the same. And legal drinking age consumers continue to engage with beer at similar levels across all generations, and compared to historical levels, it's the occasions that are less. Recognizing this, our strategy was built to develop a portfolio that appeals to a wide range of preferences and captures more occasions. So, as we navigate these macro pressures, we are continuing to execute this strategy and prudently invest behind our business. To build on the strength of our core power brands, to premiumize our business in both beer and beyond beer, and to develop and leverage our capabilities and partnerships to support profitable growth. In the U.S., our core power brands, Coors Light, Miller Lite, and Coors Banquet, have retained the unprecedented shelf space gains achieved in spring of 2024. Collectively, they commanded a 15.2 volume share of the industry for the first half of the year. Recall that three years ago, these brands collectively commanded 13.4% of the U.S. industry. and what's clear in the scanner data and as shown on slide 20 is that these brands have held most of their share gains from the last two years through the second quarter banquet in particular has been a strong performer after 16 consecutive quarters of share growth it was a top five volume share growth brand in the quarter and given it's in only about half the buying outlets of course light we believe there is significant distribution runway ahead in fact banquet gained over 15 distribution in the first half of this year growing across every channel and on top of over 15 growth in the same period last year in canada despite a challenging industry backdrop the molson family of brands with its deep canadian roots posted another quarter of volume share gains while Coors Light, which is proudly locally produced, held its number one light beer position in the industry. In email and APAC, the industry in the UK has remained highly competitive, and in the central and eastern Europe region it continues to experience softness related to escalating global and local political and economic tensions. But our brands like Carling in the UK and Azjuska and Croatia remain segment leaders in their respective markets, which we intend to continue to support with targeted commercial plans. Turning to premiumization, as we have said for several quarters now, in the U.S. there has been a shift to value-seeking behaviors, but it has been focused on pack size rather than on brands, and despite the pressure on the consumer, the industry continues to premiumize, albeit currently at a slower pace. So we remain committed to our premiumization plans, which are focused on both beer and beyond beer. Over the last few years, we have talked a lot about our premiumization successes outside the U.S. In Amerian APEC, it's been fueled by a hugely successful innovation in Madrid, which we believe still has significant runway, both in its initial market of the UK and through recent geographic and brand extensions in fact in the latest 12 weeks as of june 14 madrid had overtaken peroni to become the number two brand in the world's lager segment and number four beer overall in terms of value across total trade in the uk in canada premiumization has been led by the ongoing strength of miller light and our flavor portfolio but in the us our largest market we under index and above premium which makes it a big opportunity our peroni plans that began in the second quarter are starting to show positive results with the brand growing volume double digits in the last 13 weeks through july the 27 supported by continued growth in chain and on-premise placements and while smaller for now we are encouraged by our innovations Blue Moon Non-Out continues its rapid growth and we are seeing growing placements for our new higher ABV brands, Blue Moon Extra, Simply Bold and Topo Chico Max Margarita. These higher ABV brands not only support our push to expand in C-stores, but are particularly timely given current value-seeking behaviors. And while these innovations are helpful to their respective brand families, we recognize the challenges of their big flagship brands and are focused on stabilizing them. For example, with Blue Moon, we have completed the pack size conversion to 12 from 15 packs. This was a near-term volume headwind, but it's very positive for margin. In the on-premise, which is a big channel for Blue Moon, we saw dollar share trend improvement during the second quarter. And in the third quarter, we have been ramping up a new national advertising campaign with comedian Colin Jost. And then there is Non-Alp. Fieber Tree is now our highest nsr for hitley the brand aside from full strength spirits while we began to consolidate fever tree into our financials in february we only completed the distribution network transition in june and the incoming distributors are very excited about the opportunity to significantly expand fever trees presence across both existing and new channels and buying outlets it's early days but the brand has already contributed meaningfully as the key driver a positive brand mix in the Americas. And while Fiebertree is already the world's leading supplier of premium carbonated mixes with the number one tonic and the number one ginger beer by value in the U.S., we believe we can accelerate its growth in the U.S. over time by leveraging the scale and strength of our distribution network combined with our marketing capabilities. Now before I pass it to Tracy, I'll sum it up to say, it's been a difficult start to the year, but we view beer as resilient. And amid a challenging macro backdrop, we are focusing on what we can control to position our portfolio and our business for long-term success. That means keeping our core power brands healthy, continuing to premiumize in the mayor and APAC in Canada, and successfully executing our plans in the US. Leveraging our deep capabilities across our organization to support premiumization and focused innovation, supply chain efficiencies, and commercial effectiveness. And utilizing our enhanced financial flexibility to prudently invest in our business and return cash to shareholders. And with that, I will pass it to Tracy.

Thank you, Gavin. We are very pleased with the health of our balance sheet and our strong cash generation. And this is particularly important during a challenging macro environment, as it allows us to continue to invest behind our brands to help ensure their long-term health, to continue to make capital investments that support our growth initiatives and cost savings plans, and to not only pay what we view as a competitive dividend but also execute a meaningful share repurchase program as we continue to believe our stock is a compelling investment. In fact, we have raised the quarterly dividend each year since 2021, and we have actively executed our current share repurchase plan since it was announced in October 2023. We have repurchased 9.4% of our Class B shares outstanding. It's an up to five-year, $2 billion plan, and we have utilized almost 55% in under two years. For perspective, if we had executed it on a straight line basis, we would have only utilized 35% of the plans so far. With that, let's discuss our financial outlook. First, the impacts of the global macro environment are multifaceted and difficult to predict. And while we have included in our guidance our best estimate of some of these factors, external drivers may significantly impact our actual results either up or down. As it relates to tariffs, as we have previously said, while we are a global business, our products are generally made in the markets in which they are sold and with locally sourced ingredients. So we don't expect a material direct impact from the loan tariffs on our input costs. That said, tariffs do have indirect impacts, like the recent spike in the midwest premium pricing. While our extensive hedging program can help to mitigate some of the impacts, due to the guardrails of our program, we are never fully hedged. Further, given it's opaque pricing and at times limited liquidity, hedging the midwest premium can be difficult and expensive, and for these reasons the midwest premium is one of the commodities for which we currently have the least amount of hedge coverage. With that, let's discuss the drivers of the guidance Gavin outlined. Our top-line guidance range now assumes the U.S. industry is down four to six percent for the second half of the year. Our price mix assumptions are unchanged. We expect an annual net price increase of one to two percent in North America in line with the average historical range. We expect mixed benefits from cycling contract brewing from 2024 as well as from premiumization. We expect to grow above premium net brand revenue in EMEA and APAC and Canada as well as make progress on our U.S. above premium initiatives. Fever tree and the consolidation of ZOA are incremental to the top line but we are also cycling the divestiture of the smaller regional craft breweries in the third quarter of 2024 and more significantly 2024 Pabst and Labatt contract brewing volume as these contracts terminated at the end of last year. We expect the related America's contract brewing headwind to be 1.9 million hectolitres in 2025. In the first half we cycled over 1.1 million hectolitres and we will cycle over 450,000 hectolitres in the third quarter. Also, last year we had higher than typical first-half inventory bills related to the Fort Worth strike, which ended in mid-May. As a result, SDWs outpaced STRs by 1.1 million hectolitres in the first half of last year. This year, SDWs outpaced STRs by 800,000 hectolitres in the first half. So year on year, we had an approximate 300,000 hectare shipment timing headwind in the first half that we expect to reverse in the second half and mainly in the third quarter. Note that we did have some shipment trend catch up to STRs in the second quarter, which had an approximate 150 basis points positive impact on U.S. financial volume in the quarter. We had previously not expected to build higher than last year, given the cycling of the Fort Worth strike. However, we were able to ship further ahead of SDRs than expected due to the softened and anticipated industry demand. For a detailed review of these U.S. shipment trends, please refer to slide 21. Moving down the P&L, we expect NICS benefits from lower contract brewing and increased premiumization as well as productivity improvements and cost savings to now be more than offset by higher volume deleverage given the industry volume trend, as well as higher mid-west premium costs. For the full year, this would result in mid-west premium costs exceeding the prior year by $40 to $55 million. We now expect MG&A to be down slightly for the year, as we now anticipate lower incentive compensation due to the adjusted outlook for this year. Also, and to a lesser degree, the fever tree one-time transition and integration fees were less than expected. totaling approximately $30 million in the first half of the year. Again, these fees will be recovered through net sales over the next three years, beginning in June. As for marketing, our plans are unchanged. We intend to continue to put the right commercial pressure behind our key brands and innovations, including our core power brands, Peroni, the Blue Moon family, Madri, and our non-alcohol portfolio. While marketing investment was down in the second quarter, cycling up spend in the prior year period, we expect it to be up in the third quarter due to the timing of our commercial plans and lower spend in the same period last year. As a result, we expect marketing investment in the peak summer months to be consistent with prior year period levels. We are also slightly adjusting our net interest expense outlook. We now expect $225 million, plus or minus 5%, as compared to $215 million, plus or minus 5% previously. This is driven by lower cash balances, including the impact of higher share repurchases, as well as foreign currency impacts. And lastly, we are reaffirming our underlying free cash flow guidance of $1.3 billion, plus or minus 10%. In closing, with a strong global brand portfolio, healthy balance sheet, and strong cash generation, we are confident in our ability to navigate these challenging times while supporting the long-term health of our business and brands. We are committed to protecting and growing our underlying free cash flow while making prudent capital allocation decisions that support our growth initiatives and allow us to return even more cash to shareholders. With that, we will take your question. Operator?

Thank you. We will now begin the question and answer session. If you would like to ask a question today, please do so now by pressing start followed by the number one on your telephone keypad. If you change your mind or you feel like your question has already been answered, you can press start followed by two to withdraw yourself from the queue. Our first question today comes from Peter Grum with UBS. Please go ahead, Peter.

Thanks, Operator, and good morning everyone. I wanted to touch just on the updated guidance. Can you maybe just, you know, unpack the moving pieces a bit more? Clearly the top line is a bit pressured here, which we can see in the data, but can you maybe just unpack the profit headwinds, and specifically, you know, aluminum and kind of the Midwest premium? And I guess as we look out to the back of the year, how does the kind of updated guidance impact the second half performance? and I guess related, you know, still early, but are there any implications that we should consider today as we look out to fiscal 26?

Thanks, Peter. Good morning. Appreciate the question. Look, from an updated guidance point of view, you know, I would put it on three things, right, that we did not anticipate the last time we spoke. One is the industry did not get better as we were expecting it to. You know, we had expected it to navigate back to where it's been for the last few years of around down three, and it didn't. And certainly consumer confidence and the macro environment, whilst we continue to believe very strongly that it is cyclical, we're not seeing any signs of that changing in the balance of the year. And it certainly didn't in the second quarter. So that was probably the biggest driver. Obviously, we did not expect the dramatic increase in the Midwest premium of 180%. We've talked a lot about that, and Tracy can get into more detail on the difficulty of hedging and forecasting that. So that obviously played a pretty significant negative role in our Q2 imbalance of the year assumptions. And frankly, our share performance did not meet our expectations. So the first two I would characterize as somewhat out of our control, and the third one is within our control and our shared performance wasn't what we had expected. You know, it stayed relatively the same as it did in Q1 and we had expected an improvement and, you know, our estimate of our shared performance was a little better than what you might see in Zircona and so on because our on-premise performance is better and so we estimate we lost about 50 bps of share in the second quarter, and we've made the same assumption for the balance of the year. Now, obviously, we're working very hard to change that, but from a guidance point of view, we've assumed a little change in our share performance. From a sort of second half, and I think that sort of covers the second half, but from a longer-term point of view, Peter, So, you know, we still believe, as we said in our remarks, and I think the environment supports that, is that the current industry decline is cyclical. Consumer confidence will turn. I don't know when, but it will turn. And the Midwest premium will revert back to the mean from these, you know, extreme moves that we've seen, both of which have had a pretty negative impact on our business this We've got a very strong balance sheet. We deliver really strong cash flow, as you heard from Tracy, and our updated guidance did not change that. We continue to be very pleased with how we've retained the majority of our market share on our core brands. Coors Banquet is on fire. Our non-alc strategy is coming together with the acquisition of Fevertree, and all of that is incremental in the second half. And we'll still have incrementality, obviously, next year as well. It provides a nice halo effect to ZOA. Peroni, our plans kicked in in the second quarter and, you know, brands doing very, very well. Canada is holding its own from a market share point of view. And, you know, Molson Canadian is doing well. Metal Light's doing well. Coors originals doing well as we head into next year. And when you look at EMEA and APAC, our premiumization strategy is doing very nicely, led by Madrid and frankly others. If you look towards the balance of the year this year, contract brewing headwinds become less and less as we head towards the end of the year. In the fourth quarter, I don't think we've got any real headwinds from a PAPS point of view to speak of. We obviously still have the FIFCO headwind. And then next year that all goes away, right? So we'll have no headwinds from contract brewing. Tracy spoke about the shipments in the back half of the year, and whilst we did get some of that into the second quarter which we weren't anticipating given the performance of retail sales, we do get the rest of it primarily early in the in the third quarter um and um in my own APAC we're expecting to perform um better from a from a top line point of view as we as as we head into the into the back half of the year given the given the environment so Tracy did I forget anything no I think you covered it all yes thanks Peter thank you our next question comes from Chris Carey with Wells Fargo Chris

please go ahead.

Hi, good morning. I wanted to follow up on a couple areas there. One is just a clarification. Tracy, the impact from Midwest premium increases that you're expecting for the year. Have you seen any of those increases in Q2 or is that all in the back half of the year? I fairly paltry. So I just wanted to confirm that piece and how we think about the aluminum inflation, perhaps more on a 12 to 18 month timeframe. And then just following up on the overall category, I think there are certainly a number of reasons why we may view what's going on cyclically. A lot of categories in consumer are dealing with sluggish trends. the question i would have though is volumes in the beer category have been soft going back to 2022 obviously the category leader dealt with a pretty substantial headwind but nevertheless i wanted to just test that confidence level around this being cyclical versus perhaps changing in consumption and habits and how you you know reconcile or get comfortable with that concept demits kind of, you know, a category that's been a bit softer over the past few years. So thanks on those. Appreciate it.

Thanks, Chris. Trace, if you wouldn't mind taking the Midwest premium one, I'll talk a little bit more about the category and our belief in it. Look, I think from a consumer confidence point of view and the impact that had on consumers in a number of different ways, Chris, took place towards the back half of January and early February, right? And I mean, it's clear that, you know, consumer confidence took a hit at that time and frankly hasn't recovered. So, you know, we continue to believe that over time that will change. I mean, you know, it could be sooner rather than later, or it could be in the same time period next year. You know, the items that have been impacting the overall alcohol category, like I've often heard GLP-1s talked about, I mean, we don't have a lot of data that suggests that that's having any meaningful impact on either the alcohol category or our category at this point. And, you know, the other item that gets talked about is D9. And I think the impact of D9 does vary by market. And, you know, in some markets it's not sold, and in others it carries strong restrictions. And so that's certainly an area that, you know, we continue to monitor the impact of that. You know, I think consumer confidence has had a disproportionate impact, as I said, across some consumers differently to others. And again, we believe that that is cyclical. Tracey, do you want to add anything on Mid-Best Premium?

Yeah. So, hi, Chris. Look, I mean, no one expected the Mid-Best Premium to increase 180% from the beginning of the year. So for us, even though we are somewhat hedged, Because it is such a difficult, it's not transparent, it's expensive to hedge. It is a commodity that we, you know, the least amount hedged. But as it equates to the balance of the year, I mean, we're expecting an incremental $20 to $35 million of Midwest impact for the balance of the year. So, you know, that's around 60 to 75 cents a pound. Our full year impact is between $40 and $55 million. And again, that's just the Midwest premium. You know, from a, you know, rest of a commodity point of view, you know, our hedging program is very extensive and we expect very little impact from tariffs. But these indirect impacts, you know, specifically the Midwest premium, is just a problem because it is so difficult to hedge and it just doesn't follow normal market dynamics.

And then just to tie a bow on the industry, Chris, I mean, our acceleration plan strategy is designed to address some of the areas where we believe that there is an opportunity, right? So our beyond beer strategy from both a non-alc beer point of view and also from a non-alc point of view is obviously a fairly close tie-in between a fever tree from a mixer point of view and alcohol. And so that's an area that we're leaning into and feeling really good about the initial progress that we've made on fever trees. So our innovation strategy and our brand portfolio strategy is designed to address consumers' changed consumption habits and differing occasions.

Thank you. Our next question comes from Andrea Texera with JP Morgan. Please go ahead.

Thank you, Operator. Good morning, everyone. Kevin, I appreciate your comments on the consumer confidence potentially improving. Now, I'm curious to see if you're seeing any green shoots, because all we hear from your peers and retailers is that, obviously, with inflation hitting harder in the second half with tariffs, we could see things getting worse before they can get better. So can you comment on the exit rate for consumption in North America and Europe? I know from your slides, and I appreciate the details there, you're still running STWs against STRs at a higher level. So I was hoping to see if you can help us with the cadence as we incorporate your new guide.

Actually, do you want to talk about shipments? Perhaps, and I'll just talk about how we're seeing the consumer help by market. You know, in the US, Andrea, we have not seen an improvement in overall consumer confidence or behavior. So we have not seen that yet. And, you know, we are continuing to see value-conscious consumers engaging in some channel and pack shifting, as we've seen previously, certainly, you know, buying more singles and large packs and less of those mid-packs. But that certainly has continued. I mean, we obviously serve a very broad set of consumer demographics across many income levels with our portfolio. And we think we've got a portfolio that meets everybody's needs. So, no, we haven't seen much change. The environment is impacting all consumers in one way or another. We do see the Hispanic consumer is disproportionately impacted by the overall macro environment. If you look north of the border in Canada, I mean, inflation has eased over time, but consumers up there also remain cautious about spending and ongoing concerns around housing and food costs. And, you know, while interest rates have stabilised, I think there is a more global concern around trade tensions and tariff-related impacts. So, you know, whilst Canada beer industry volumes have, or trends have been somewhat similar to the US, they've performed slightly, slightly better. In the UK, the consumer confidence index remains negative. We did see a little bit of an improvement in May. I think there's just a more broader optimistic view of the overall economy in the UK. But overall sentiment, I think, I would say remains cautious. And then in Central and Eastern Europe, certainly that consumer is probably being impacted more than most, given the significant political and socioeconomic issues that are impacting the Central and Eastern European markets. So that's sort of a run through our markets and how we're seeing a consumer confidence. Tracy, the shipments.

Yeah, so in terms of the first half of the year, our shipments did outpace our sales to retail by about 800,000 hectolitres in the first half. Five years was about 1.1 million hectolitres, so there's about 300,000 hectolitres to reverse in the second half of the year. Most of that will be in Q3. And as always, we plan to ship to consumption, so we expect that to converge, but as I say, mainly in Q3. Thanks, Andrea.

Our next question comes from Bonnie Herzog with Goldman Sachs. Please go ahead, Bonnie.

Thank you. Good morning, everyone. I just had a quick question on pricing and then the promotional environment. I guess, given the pressures on the category and consumers, how are you thinking about pricing for the remainder of the year? Also, what about the promotional environment? Are you seeing signs of levels increasing recently, and how do you expect that to play out? Thank you.

Thanks, Bonnie, and good morning. Look, I mean, it's quite common to see heightened competition with strong promotional activity during the summer, and you see that easing up in the shoulder months. And we've seen that in prior years, and we're seeing that again. And again, we just take a strategic approach to how we evaluate the competitive environment. From an overall pricing point of view, the historical average, as we've said before, ranges in that 1% to 2% range. And, you know, we expect that to fall within that range again this year. You know, whilst we have seen the impact of the economy, consumer confidence, you know, having consumers searching for value, any trading seems to be coming in channel and backshifting, not necessarily in segment trade now. Thanks, Bonnie.

Thank you. Our next question comes from Filippo Filoni with Citi. Please go ahead.

Hi, good afternoon, everyone. I wanted to follow up on the margin question, the Midwest premium for the second half. If I take the 20, 35 million incremental Midwest premium cost, Citi is a relatively small headwind to margin. So maybe, Tracy, can you talk about, like, the other drivers of the big margin contraction that is embedded in your guidance in terms of volume de-leverage, SG&A for the backups of the year? And then just to follow up on top line, Gavin, you mentioned on-premise is performing better than what we see in track channel data. So can you give us a perspective of how July played out relative to your expectation, including the on-premise business? We see still soft trends, especially around 4th of July in track channels, but I'm curious the total company and total industry trends, including on-premise.

Thanks, Filippo. Trace, if you'll handle the margin one, I'll just quickly deal with July and the on-premise. I mean, look, from a July point of view, as we say every time on these calls, right, we've only got a few weeks of the following quarter in the book. So, you know, let's see what happens for the balance of the quarter from an overall industry and our performance point of view. From an on-premise point of view, you know, I know we've talked a lot about Blue Moon over the last couple of years, and we are starting to see improvement in the on-premise. You know, Belgian White's STR trends improved, you know, six points in Q2 versus Q1, which is very encouraging given that brands are built and expand from the on-premise out. So we're pleased with that. Peroni is obviously playing a role in that as we implement the plans we've talked about for a while now, which kicked off in Q2. So that's been a positive catalyst for us as well. And then Coors Banquet just remains on fire as it gains distribution, both in the on-premise and the off-premise. So I would say that those are the three brands that are having the most positive impact for us in the on-premise. Tracy, do you want to get into March a little bit more?

So from a margin point of view, we don't specifically give gross margin guidance. But just to note, our underlying growth margin percentage has improved in each of the last two years. But a couple of things as we look at 2025. So we've spoken about the top line. In terms of the COGS, you know, we do have the deleverage headwind driven, you know, by the contract brewing, which we've discussed. And we also have higher premiumization, which drives higher COGS across our business units. We have spoken about the midwest premium and although we do have productivity improvements and cost savings, these are more than offset by the deleverage and premiumization as well as the midwest premium.

Thank you. Our next question comes from Rob Ottenstein with Evercore ISI. Rob, please go ahead.

Great. Thank you very much. a pretty, um, pessimistic view on, on second half volumes for the industry. Uh, and I'm, I'm assuming that, that July was pretty bad. And, and this is, you know, in the face of, I think easier comps, um, you know, given how bad the weather was last year. So I, I guess what I'd, I'd love you to help us think through, um, you know, assuming that does play out the way, the way you're guiding to what what are the impacts on the industry and how can the industry address that so are you starting to see pressure for instance on shelf space not not for you specifically but for the beer industry as a whole uh you know as as retailers start to look at the fall and shelf set changes and in the next year and how you may be combating that any impact on not just yours but industry brewery footprint you know the potential for some sort of consolidation of volumes and you know maybe doing a reverse doing more contract brewing instead of you know letting contracts go, actually maybe bring more in to keep brewery utilization going, given the high fixed costs of breweries and dependence on volume. So just love to get, you know, your thoughts on, you know, industry action, your reaction to these unprecedented volume declines. Thank you.

Thanks, Rob. Yeah, a lot of questions in there. So let me try and take a little more. So from a comps point of view, no, July had easier comps, but the rest of the year did not, if you remember correctly. So yes, there was poor weather and the industry was pretty tough in July of last year, so the comps are a little softer in July. Going forward, they're not. They're actually, you know, the industry improved quite nicely heading into the balance of the year from about August onwards. So the comps don't get easier from an industry point of view. They get tougher. And obviously, we've built that into our thinking as we put the guide out there. From a shelf space point of view, look, from our point of view, you know, we obviously had a significant uptick in 2024 in both the spring and in the fall of 2023. We held on to those gains. And so we finished 2024 significantly higher than we did in 2023. And again, in the spring of this year, we held on to those shelf gains. And, you know, Banquet, again, was a particularly strong beneficiary of that. We gained strong double digits. And we're not expecting to see significant activity for the fall of 2025 based on what we're seeing and what we're hearing. And frankly, we would know if it was different by this time. Where retailers have made shelf changes to accommodate other brands, they've made in the flavor space and the craft space. Primarily, I would say they haven't made them in the in the traditional beer space. You know, from a brewery footprint point of view, obviously our capacity utilization varies by season. So in the summer we're fully utilized and in the shoulder periods not necessarily. I would tell you that removing PAPs from our system is very, very helpful. It has allowed us to remove a lot of complexity. It's allowed us to free up capacity in the summer, it certainly helped our decision to onshore Peroni, which we have now completed, and it's completely onshore, and obviously we see a big opportunity for Peroni, and we're starting to see that benefit coming through in the second quarter, I've often said, and look forward to seeing in the future that Peroni can, there's no reason why it can't be as big as its other European competitors and we certainly gained meaningful share versus our European competitors in the second quarter now that our plans have kicked in. It allowed us to tidy up our footprint by closing a couple of smaller breweries. So we were able to tidy that up and it certainly allowed us to bring yingling and our yingling relationship into our business and produce in a couple of breweries, and it'll allow us to expand further with yingling when the time is right. So, you know, as it relates to the brewery footprint, we're pleased with our brewery footprint, and yeah, I think that covers off on all of Rog's points. Thanks, Rob.

Thank you. Our next question comes from Eric Sirota with Morgan Stanley. Please go ahead, Eric.

Great. Good morning, everyone. I wanted to first ask you, Gavin, in terms of recent market share trends. Clearly, the off-premise trends, at least, have weakened vis-à-vis your largest competitor. I know you called out better on-prem trends, but are there any changes to your marketing or go-to-market strategies that you're implementing or contemplating in light of what seems like a resurgent competitor, at least for two of their main brands? And then for Tracy, a couple of housekeeping items. Could you help quantify how much the incentive comp reversal was? Was that all in the second quarter? And then in terms of the free cash flow, you know, how much of, you know, sort of how much of the bridge between the earnings reduction and their free cash flow reiteration is the cash tax and working capital? And, you know, all else equal, would the working capital benefits reverse next year or are these sustainable? I know there's a lot there, but thank you.

Thanks Eric. Yeah, a lot there. Let me see if I can answer that. Look, I think from an overall share point of view, I think I'd start by saying that total Nolson Coors share trends in the US, now I'm talking specifically in the US, has improved each quarter since the third quarter last year, right? So Q3, we were down about 100 basis points. Q4, we were down about 70. Q1 was down about 60 q2 is about about the same right um and if you peel back the envelope as to where we we we are losing that it's in flavors themselves is the biggest part of that of of that decline and so you know we are seeing some improvements in topo chico it's not enough to offset um the the declines that we're seeing on on simply and and busy uh from an economy portfolio point of view, that's roughly about another third of the decline. And obviously, our two focus brands in there, Miller Highlife and Keystone Light, are showing better trends than the number of total brands that we still have in that segment. And then core, right? We talk, and I have talked a lot about our core share retention because it's factually We have retained 180 points of the share that we gained in 2022, and it is meaningful. You know, Banquet continues to be the star of the show there. It's up another, you know, 20 points in Q2, and it remains one of the fastest-growing major beer brands in the U.S. In fact, it grew in all 50 states plus Washington, D.C., in the first half of the year. So we are very pleased with Coors Banquet's performance. What are we doing about the rest? Well, you know, as we head into Q3, we're focused on driving our Miller Lite 50th anniversary campaign. We're going to execute strongly behind our NFL alliance presence. We have a relationship with a number of NFL teams. So you'll see us in all channels and we'll see incremental media pressure, particularly in our Great Lakes geography. We're going to be executing against our Coors Light college programming with our ESPN game day partnership. And we're going to continue to put the accelerator down on Coors Banquet's momentum as we start your legacy program. And from an above premium point of view, I've talked a lot about Peroni and Madrid from a Blue Moon point of view, you know, we are working very hard to change the trajectory of that brand. And we are, as I said earlier, seeing, you know, green shoots starting to show up in the on-premise and we're seeing good performance behind our innovation, particularly Blue Moon non-alc. But, you know, from a higher ABV point of view, obviously our strategy behind Blue Moon and Simply and Topo Chica and the convenience stores is something we're putting effort behind starting in the second quarter. So, you know, big, important brand for us. It's a top priority for us in the boat premium, and we remain very committed to turning it around. I think that was all. Is there anything you want to tell you?

Yeah, so every common incentive compensation, we accrue for incentive comp throughout the year. And then based on our adjusted outlook for our guidance, we have reversed a large portion of what we had accrued in the first half of the year. In terms of the free cash flow, look, the cash tax benefits that we've got, as well as the working capital, largely offset the profit shortfall, and then if you recall, when we had our Q1, we did cut our capital spend by about $100 million. So, you know, that gives us the free cash flow of around 1.3 billion plus or minus 10% as we have guided to.

Thanks, Tracy.

Thank you. Our next question comes from Peter Galbo with Bank of America. Please go ahead, Peter.

Hey, good morning, Gavin and Tracy. Thanks for all the detail in the deck. Very helpful. Tracy, I just wanted to go back maybe to Filippo's question, particularly around the volume deleverage piece. I think it was about a 300 basis point impact in the first half. And I know that you kind of gave some high-level commentary on what it would be for the year, but was just hoping to unpack that a bit more as we think about the second half and the year specifically, you know, how we should think about the volume D leverage impact. Thanks very much.

Yeah. So in terms of our outlook for the year, what we have said is that SDWs outpaced the SDRs by about 800,000 hectoliters in the first half of the year, we always plan to ship to consumption. And so there's going to be about 300,000 or so that we will reverse in the second half of the year, mainly in Q3, because last year for the first half, we did ship more than the retail by about 1.1 million hectolitres. So the difference between that is about 300,000 hectolitres, which we expect to reverse. And then, yeah, because we plan on shipping to consumption, we expect most of that to converge by the end of the year, but mainly in Q3.

Thanks, Tracy.

Thank you. Our next question comes from Bill Kirk with Ross Capital Partners. Please go ahead, Bill.

Good morning, everyone. So my question, you know, since pre-COVID, since 2019, you have more market share than you did. Your earnings per share are much better than they were. But the stock price doesn't really reflect those improvements. So I guess the question is, if you aren't getting credit for market share gains and profit growth in your current categories, does something need to strategically change? And then, when underlying COGS per hectolitre are up mid-single digit or more, why only take a 1% to 2% price increase?

Thanks, Bo. Look, from the first part of your question, I mean, obviously, and we've said this before as well, is we believe that our business is a very attractive investment at these levels. And we continue to demonstrate our belief by buying back significantly ahead of the authorized board program from an overall category point of view. I'm very pleased with our acquisition of the U.S. business of Fevertree and the integration is going well. And, you know, our volumes are exceeding our expectations from a business case point of view. Our distributors are excited about it. And, you know, it really does give us a nice, you know, footprint from a non-ALC point of view. And we believe a halo effect to our other non-ALC activities. I was all second. Oh, pricing. Yeah. I mean, look, Bill, we obviously look at pricing from a, you know, every single market is different. Every state is different. Every brand is different, and we obviously take any number of factors into account, not only input costs, but also consumers' behaviour and receptivity to price increases and so on. So we've got a very robust revenue management program, and we will continue to do what we think is best for our brands in every single market.

Thank you. Our next question comes from Robert Moscow with TD Cohen. Please go ahead, Robert.

Hi. Thanks for the question. In the past couple of years, the productivity gains at Molson Coors have been substantial and helped offset a lot of the negative impact from volume deleverage. But now it looks like the volume deleverage is accelerating and you've had to call down your guidance. Tracey and Gavin, at what point do you have to take another look at your acid footprint, both in terms of manufacturing and distribution? With volume declining at this pace, will you have to take another look at that and maybe make more reductions? Thanks.

Thanks, Robert. From a capacity point of view, we're pleased with our brewery footprint. We have, obviously, really strong utilization from a capacity point of view in the summer months. You know, we've removed contract brewing from our system completely, which is why we have that headwind and have had the headwind all year. That obviously starts to tail off as we head into the back half of this year. But, you know, not much more I can say than what I said earlier, Robert. I mean, removing paths from our system has proven to be very helpful. It's allowed us to take a lot of complexity out of our system. It's allowed us to, you know, change things from a shift configuration point of view, from a line point of view, from a temporary labor point of view. It's overall, from a very footprint point of view, been very positive for us. And it's allowed us to bring Peroni in, which, as I said, is growing very nicely. And we hope to have that brand as a big brand in the future. And it's allowed us to support our Yingling partnership, where we've had a very successful launch in Illinois this year. So, you know, we're pleased with our brewery footprint, I guess. Thanks, Robert.

Thank you. Our next question comes from Michael Lavery with Piper Sandler. Please go ahead, Michael.

Good morning. Thank you. I just wanted to come back to the guidance update and the EPS bridge. Midwest Premium has gotten a lot of attention, but as you've called out the math, it's maybe one to two points of the 10 or 13 point cut to EPS growth outlook. and you've got some stepped-up buybacks as well. What are the missing pieces, I guess? And, you know, if you've said what's new is Midwest Premium, the category trends, and then your share expectations, is it just, you know, all of that and the operating deleverage that we've covered a bit? Or is there other inflation we should have our eye on as well? Or, you know, you mentioned the interest expense change. That's also quite modest. So, I mean, you know, help us maybe figure out if there's any other moving parts here or if just the pipeline flow through is that significant.

Hi, Michael. So, look, I mean, there is some marketing timing. You know, we do expect to spend, you know, similar levels of marketing in our peak summer selling season as last year. You know, so that's one thing. But the other thing is, remember, our EPS is not in constant currency, so we do have foreign exchange impacts to it. And, you know, as the dollar weakens, you know, that'll certainly be a tailwind. And then the other thing that goes into it is tax. Now, we have kept our effective tax rate guidance, you know, at the same level as what we had previously. But those could be, you know, two items that do impact our EPS. But, yeah, just probably to call out that, you know, although marketing was down in Q2, we do expect it to be up in Q3 because of some of the timing of our commercial plans and also cycling lower spending in prior year. Thanks, Tracy.

Thank you. Our next question comes from Lauren Lieberman with Barclays. Please go ahead.

Great. Thanks. Good morning. So I know you talked about the software US share performance in the release. And I was just curious to kind of talk a little bit more about that, given the competitive premium light space these days. And like, are there any specific regions in the US where you're seeing underperformance? And I know you said the guidance the second half assumes these shared trends kind of are consistent, you just comment on our marketing, But I was curious about plans to defend share in the second half and beyond. Like, you know, is there a point where you'd consider addressing pricing? Is it a matter of, you know, more marketing? Or is it a view more like don't overspend into a soft market backdrop?

Yeah, thanks, Lauren. Look, I mean, we're obviously very thoughtful about how we spend our marketing and we turn it over, you know, quite carefully. But certainly we're seeing, you know, really pleasing momentum in a number of our brands, you know, without wishing to repeat myself too much, right? I mean, we're seeing strong momentum behind Banquet, Peroni, and, you know, we've got our non-alc portfolio coming in, you know, Viva Tree, we're spending more money behind it. And Madrid in our other markets has performed very well. So, you know, notwithstanding the current overall macro environment, which we, as I've said, believe is cyclical, we're going to continue to invest behind our brands so that, you know, when the tide turns, they're in the best position that they can be. You know, I talked a little earlier on about, you know, some of the areas that we're focusing in on our core brands, you know, not only Banquet, but also Miller Lite and Quiz Lite, and we're going to continue to support those. But, you know, you can be assured that we turn over every marketing and sales dollar carefully for effectiveness before we spend it.

Thank you. Our next question comes from Carlos Laboye with HSBC. Please go ahead.

Good morning, everyone. Can you come back, please, to the cash flow that you mentioned earlier? You mentioned tax benefits. There was another one. If you could expand on both of those, please, it would be helpful.

So, for our free cash flow, we've received some cash tax benefits this year, as well as some working capital improvements. So that has enabled us to keep our free cash flow guidance at the $1.3 billion plus or minus 10%. Those are the two items that we mentioned in particular.

The biggest driver there, obviously, is the benefit coming out of capital deductibility from one big, beautiful, bold point of view.

Thank you. Our next question comes from Nadine Sawat with Bernstein. please go ahead.

Yes. Hi, everybody. Thank you for taking my question. I know we've talked a lot about the US. So I'd actually like to turn attention to EMEA and APAC. Your financial volumes were down close to 8%. And I know you called out weakness in a number of the markets, but could you provide perhaps some additional color by region? So how is the UK business doing versus your other markets?

And then how do you view this segment performing over the remainder of this year specifically thank you thanks Nadine look I mean the market in the UK continues to decline in both in both channels we have seen a little bit of a category improvement Q to date starting to see some trend improvement in our shared trajectory you know that has been aided by the benefit of the Easter shift, right, which moved out of Q1 and into Q2, and I know you live in the UK, so you will know that the weather has been particularly good in the UK. We are expecting those figures to show, you know, a somewhat greater decline once we've got June data in, because I think we're lapping a big football tournament from last year. So there is that going on um competition in the marketplace it remains um intense frankly and and and and you know despite the increase that we've seen in promotional frequency um in the off-premise with our largest brand it it does um remain challenged given the actions of of some of our competitors um which which we have chosen um not to um not to not to follow i mean we're We're seeing some of our competitors in that space price consistently 20% lower than Carling on Shell. So that certainly challenged us from a main brand point of view. Our Madrid volume growth, it continues. It's up, again, with single digits in Q2. And we're going to continue to put the right level of commercial support behind those brands. If you look across the water into our Central and Eastern European business, look, there's no doubt that the overall beer industry remains sluggish in this market. It's driven by another decline in consumer confidence that began at the end of 2024 after we'd seen some improvement. And, you know, those factors that are driving that are well understood and well known from a global political point of view and local, social and economic tensions that exist there. We have seen a higher promotional activity across most of the markets. We have had some challenging customer negotiations as well, which are now resolved. And so all of those factors impacted our volume performance in the first half of the year. You know, we continue to remain optimistic about the growth potential for our Central East and European businesses. You know, we're putting investments behind our national power brands, and we're supporting the recent launches that we have in the above premium space. We launched Madrid in Bulgaria last year, and we launched it in Romania. of this this year and both both of those doing very nicely we launched Coors in Hungary which is which is doing well and you know innovation in the beyond beer space um with for example Aspel's Pip and Wild Cider in Serbia and Bulgaria and Montenegro and Croatia is is is also doing is also doing um well although all the early days so you know real success story for us is our premiumization in our APAC business. And you can actually see that in the mixed benefits which we got in the APAC in the second quarter. I think that generated almost 490 base points of positive mix for us. So Nadine, that's kind of a quick high-level run through our European business.

Thank you. Our next question comes from Gerald Pascarelli with Needham. Please go ahead.

Great, thank you. I have a question on capital allocation. Just given the volume decline, if industry volumes and then your own volumes remain lower for longer, as you think about this business long term, do you believe larger scale M&A or more aggressive bolt-on M&A may be necessary to just expedite your portfolio towards more attractive subsectors and beverages, whether it be more non-alcoholic exposure or exposure to above premium brands, et cetera. Just looking for any color of thoughts around how M&A or evolving M&A just fits into your capital allocation strategy. Thank you.

Thanks, Gerald. Look, from an M&A point of view, I think we've been very clear about how the String of Pearls approach has worked for us. And in the early days when we still had a somewhat of a challenged balance sheet with a higher leverage ratio, those pearls were relatively small. As we've put ourselves in a really strong position from a balance sheet point of view, I'm very proud of the work that the team has done to get the balance sheet where it is after the last four or five years. That has allowed us to look at slightly bigger pearls. And certainly the one we did this year with Fevertree is very strongly supportive of our overall strategy and is a much bigger pearl than we perhaps would have considered five years ago. When you add everything up from a working capital point of view and a distribution point of view and our investment in Fevertree, that number was well north of 100 million So, you know, we remain committed to our String of Pearls approach, obviously beyond that I'm not going to comment on any M&A, but very pleased with the progress that we've made with Fever Tree so far.

Thank you. Our next question comes from Kevin Grundy with BMP Paribas. Please go ahead, Kevin.

Good morning, everyone. I was hoping to get an update on the CEO search process. given Gavin's plans to retire a year-end. Gavin, of course, you will be missed. But any update there, just in terms of where that process stands, any comments on internal versus external candidates, attributes that the board's looking for, and perhaps maybe how that's evolved a bit, given the demands of the current environment. So, any comments you can offer to folks, I think, would be appreciated. Thank you very much.

Thanks, Kevin. Appreciate the kind words. Look, I mean, the process is well underway. The board's made significant progress. Obviously, it's navigating the process very thoughtfully, given my planned retirement by the end of the year. In terms of capabilities, you know, the board is paying a lot of attention to both relevant business leadership experience along with a cultural fit. Obviously, I'm very proud of the culture we built here at Molson Coors. it's very special. As we've said previously, it's very common for companies of our size to look at both internal and external candidates for a CEO position, and that's what our board is doing at the moment. They remain supportive of our current long-term strategy, though obviously I would expect any new CEO to put their own stamp on the company. So that's the update, Kevin.

Thank you. Those are all the questions we have today, and so I'll hand the call back over to Gavin for closing remarks.

Thank you, Operator. Appreciate that. Appreciate all the questions. I'd like to close by thanking our Molson Coors team and our partners for their continued support behind our business and our brands. You know, I continue to be very proud of the dedication and commitment of our over 16,000 employees, our incredible partners, and our best in class distributed network, you know, I'm confident that together we can navigate this challenging environment and certainly emerge stronger with this team behind us. So thanks for your time today.

Thank you everyone for joining us today. This concludes our call and you may now disconnect your lines.