Molson Coors Beverage Company (TAP) Q2 2020 Earnings Report, Transcript and Summary

Good day, and welcome to the Molson Coors Beverage Company’s Second Quarter 2020 Earnings Conference Call. All participants will be in a listen-only mode. [Operator Instructions] Participants 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. Please also note today’s event is being recorded. With that, I will turn today’s call over to Greg Tierney, Vice President of FP&A and Investor Relations. Please go ahead.

Thank you, Jamie, and hello, everybody. Following prepared remarks from Gavin and Tracey, we’ll take your questions. Please limit yourself to one question and if you have more than one question, please ask your most pressing question first and then reenter the queue to follow-up. To the extent you have technical questions on the quarter, we’ll ask that you pick those up with me in the days and weeks that follow. And today’s discussion includes forward-looking statements within the meanings of applicable securities laws. Important factors that could cause actual results to differ materially from the expectations and projections contained in such statements are disclosed in the company’s filings with the SEC. The company does not undertake to update forward-looking statements, whether as a result of new information, future events, or otherwise. GAAP reconciliations for any non-US GAAP measures are included in our news release or otherwise available on the company’s website at www.molsoncoors.com. And also, unless otherwise indicated, all financial results the company discusses are versus the comparable prior-year period and in US dollars. With that, over to you, Gavin.

Thanks, Greg. Good morning and thank you everybody for joining us today. We had a strong second quarter, as is evidenced by the results we released this morning, executing well against our two main objectives as the world continues to adjust to the ongoing coronavirus pandemic. But before we talk about our second quarter performance, I would like to address the challenge of systemic racism. Racism is not a new issue. And I'm not naive enough to believe that our business alone can solve a problem that has plagued the United States and many parts of the world for so long. But I do believe we have the opportunity and the responsibility to try and be part of the solution. And that is why we have been unequivocal that we believe Black Lives Matter, and that's why we are backing up our woods with action. We developed a new action plan designed to build a more inclusive culture and increase diversity within Molson Coors. Our intent is to conduct a culture assessment of our practices and policies to guide further -- future improvement across all of our business units, increase the representation of people of color in our US operation by 25% by the end of 2023 across the country, among salaried employees and also in leadership positions, improve our hiring practices and leadership development programs to bring in highly skilled diverse talent and develop our future leaders, and much more. We’ve already committed to donate $1.5 million dollars to 23 local and national organizations dedicated to equality, empowerment, justice and community building, engaging our own employee resource groups in the process of selecting which groups to support. This is only a start. It cannot be a moment in time that passes by seem to be forgotten. We are committed to meaningful long-term change inside and outside our business. Our efforts to lead -- leave a positive imprint don't invade. Two weeks ago we released our annual sustainability report, in which we announced progress against our 2025 sustainability goals. Highlights from the report include further reductions in emissions, effective more than 99% of our packaging is now considered reusable, recyclable or compostable and an increase in the number of zero waste to landfill facilities. Addressing racism and protecting the environment and not societal issues to be addressed by someone else, to try and ask to help build a better future, and doing so is good for our business, and the communities in which we operate. But that is very clear, fostering a more diverse and inclusive environment, and exhibiting social responsibility increases employee engagement, which leads to more discretionary effort and stronger performance, which leads to better business outcomes. The actions we are taking will help our business compete and win in the future, and build in the progress we are making today, as is evidenced by our strong second quarter results. Last quarter we told you the overarching focus is the whole world deals with the coronavirus pandemic was centered on two objectives. Navigating the short-term to protect our employees, and to mitigate the short-term business challenges of the coronavirus and secondly positioning our business for long-term success and that’s just what we've done. With sound management and incredible work by our teams, we had a strong second quarter executing well against these two objectives and beating expectations for both top and bottom line performance in Q2. We did it while delivering an improved cash position and preserving the biggest firepower in our marketing budgets that can be ramped up in the back half of the year, when we expect that will be most effective. We have also benefited from the fact that our business is not as exposed to challenging markets as many of our competitors, but just the continued problems facing suppliers with much more sizeable operations in places like South Africa and Mexico. At the end of Q2, the benefits of our work to navigate the short-term impacts of the coronavirus are clear. Coors Light achieved its highest segment share ever in the United States. Let me repeat that, Coors Light achieved its highest segment share ever in the US. Blue Moon LightSky became the top selling beer of 2020 per Nielsen, and is now ranked amongst the top three growth brands in the entire cross segment, also per Nielsen behind premium Belgian White. Vizzy has already made a name for itself in an increasingly crowded US hot seltzer market. Despite not launching nationally until April, it is already the number three seltzer in a number of markets, and is beating Bud lite seltzer in repeat purchase rates. Our cross Canada joint ventures shipped its first products and we are very encouraged by the consumer reception. And in the US, our new joint venture Trust USA is already piloting opportunities for non-alcohol hemp derived CBD beverages in Colorado. We have driven progress in Canada through growth in craft and the off premise, leveraging the North American innovation Belgian Moon LightSky, as well as growth in local craft brands in Canada, such as Creemore and DDM. Our Canadian innovation portfolio is also off to a strong start with [indiscernible] a line of vodka based can drinks. Arizona Hard Green Tea and Vine, a non-alcoholic hop water. To became an early entrant in the European hot seltzer space by signing an exclusive agreement with British Hot seltzer maker Bodega Bay. And we're extending beyond our beer portfolio after signing with Miami Cocktail companies to distribute the growing brands in the United Kingdom and Ireland. And last but certainly not least we strengthened our financial position. We renegotiated our bank covenants to help ease potential short-term liquidity constraints and we suspended our dividend payable for the balance of the 2020 fiscal year, decision that we believe will put us in a stronger cash and leverage position during the pandemic. In light of these steps, we were pleased that Moody's affirmed our credit rating and kept our outlook stable. Don't get me wrong, it wasn't easy, but we were able to deliver the strong quarter despite the challenges facing our world and our industry today. Tourism in Europe has dropped dramatically and pubs in the U.K. were closed through the end of Q2 as a result of the pandemic. Some of our Latin American markets were shut down completely or partially for much of the quarter and while a number of establishments largely reopen typically in phases, some of these would quickly closed down again in the United States. Consumer demand is shifted in ways no one could have foreseen six months ago, when bars and restaurants were shuttered in the early parts of Q2, demand for kegs in the U.S. went to zero and conversely demand for cans went through the roof. Every company that makes anything in the 12-ounce can has been challenged to some degree by the global can shortage. For example, Coke and Pepsi have acknowledged challenges and [Indiscernible] corporation announced new plans to increase production capacity on cans. At Molson Coors, we have been producing and shipping can beer at significantly higher rates than in recent years. Though it hasn't been enough to meet the historically high orders we're seeing. Put a finer point in the level of demand we're seeing, we eclipsed July 4th week shipment days in the United States four times already this year. That's unheard of. You remember on our Q1 call, I said constraints and cans and paperboard would be a challenge this summer in North America. All along we've been working with our distributors in North America to try to manage it. We've been getting as many cans as possible from our suppliers who have been tremendous partners for us and we've worked to source more cans from countries around the world. At this point, we remained tight on the quiz like tall can [ph], but are seeing the situation begin to improve with respect to 12-ounce industry standard cans. We're also making progress in securing more paperboard as our supplies recently added to product -- catching up on some SKUs. Despite all of these obstacles, we continue to navigate the coronavirus effectively today, while simultaneously [technical difficulty] in the long-term. There is no better example than our new investment which is intended to quintuple our U.S. seltzer production capacity. Rolling on the strength of business launch and the upcoming launch of seltzer, we announced a multi-million dollar project at our Fort Worth, Texas brewery to include the installation of a new canning line completed earlier this year and a state-of-the-art filtration system expected to be finished later this fall. As I mentioned before, our brands will have additional marketing support in the months ahead. We preserved our marketing firepower for a calm when we expect it will have the most impact. Bars and restaurants are starting to come back, admittedly in fits and starts, and we expect to increase investment. We completed our acquisition of Atwater Brewing, a craft brewer that gives us a foothold in the eastern parts of the Midwest, and one that produces craft seltzers and beverages that extend beyond the beer. And we're excited about our new partner and their offerings. And speaking of partnerships, we recently announced we will be an official partner of the new Las Vegas Raiders football team with the official domestic beer and official craft beer and the official hard seltzer; one way that we continue to invest behind our brands, even in some challenging times. And for those of you that are excited that baseball season is underway, I'd remind you that with our new and extend partnerships, we entered the 2020 with partnerships with 50% of all MLB teams. We are pleased with how we have managed the short-term, and are confident in our plans to position the business for the long-term. Even in the midst of such uncertainty brought on by the coronavirus pandemic based on what we have seen and what we have done, we intend to maintain the strength of our iconic brands, grow our above-premium business and expand beyond the bureau. And now, I’ll pass it over Tracey for the financial highlights.

Thank you, Gavin, and hello, everyone. I will first cover the quarter on a consolidated and regional basis, then move to our outlook. With the continued uncertainty in the current environment, we have determined not to reinstate guidance at this time. But we will be giving additional forward visibility on trends and offering the perspective on how we believe we will be impacted by the coronavirus in the future. We do not expect to continue to give this visibility once conditions have stabilized, or we resume guidance. So to recap this quarter. Net sales revenue decreased 14.3% in constant currency, largely due to brand volume declines, principally in on-premise channel, which remained extensively closed during the quarter, along with the result in negative mix implications across all major markets. Additionally, our under-shipments position in the U.S. continued during Q2, mostly due to the constraint supplies of 12-ounce cans, as well as paper boat that Gavin just mentioned. These impacts were partially offset by a higher net pricing in the U.S. and Canada. Net sales per hectoliter on a brand volume basis increased 0.3% in constant currency, reflecting positive net pricing in U.S. and Canada, more than offsetting negative mix effects globally due to the various market dynamics and consumer shifts caused by the coronavirus. Specifically, the shutdown of the on-premise locations, as well as the timing of the gradual reopening of on-premise location had an adverse impact on geographic mix in Europe, and notably as many of our higher end products skew towards the on-premise, the closure of these establishments had an unfavorable impact on our brand and channel mix. Worldwide brand volume decreased 11.6%, while financial volume decreased 12.5%, reflecting unfavorable shipments timing in the US, and lower contract brewing volume. Underlying cost per hectoliter increased 0.4% on a constant currency basis, driven by volume deleverage, partially offset by cost savings and a favorable resolution of our property tax appeal for our Golden Colorado Brewing. Underlying MG&A decreased 50.8% on a constant-currency basis, driven by the suspension of on-premise activation and elimination and reduction of spending areas that has been significantly impacted by the coronavirus, for example, [indiscernible]. We also adjusted the timing of marketing investments behind brands and techs where we experienced the platform strength. In addition, our G&A spend was lower as we delivered against our cost savings and revitalization plan. As a result, underlying EBITDA increased 2.2% on a constant currency basis. Underlying free cash flow of $796.4 million for the six months ended June 30, 2020 was $235.7 million favorable to prior year, driven by favorable working capital and lower cash paid for taxes, as well as lower cash paid for interest partially offset by lower underlying EBITDA, and higher cash paid for capital expenditures. Working capital and cash tax favorability was driven by the deferral of more than $500 million in tax payments from various government relief programs into some of our geographies, in response to the coronavirus pandemic, of which a significant portion is expected to be paid in the second half of the year with the remaining amount to be paid in 2021. In North America, net sales revenue decreased 7.9% in constant currency. This decline was driven by brand volume declines and favorable shipment timing in the U.S. and lower contract brewing volumes. North American brand volumes decreased 7.8% as the on premise closures during the quarter more than offset the continued strains particularly in the U.S. in the off premise. In the U.S., brand volume decreased 5.2% complete to domestic shipment decline of 6.5% in the quarter. Net sales per hectoliter on a brand volume basis increased 0.9% in constant currency, driven by favorable geographic mix, favorable package mix and net pricing increases in the U.S. and Canada, partially offset by negative brand and channel mix attributed to the shift of volume from the on premise to the off premise. In the U.S. net sales per hectoliter on a brand volume basis increased 1%, driven by positive mix with favorable package mix more than offsetting negative brand mix in addition to the net pricing price. In Canada, negative mix more than offset the net pricing increases, while in Latin America, net sales per hectoliter on a brand volume basis declines. Underlying EBITDA increased 13.8% in constant currency as MD&A reductions more than offset the unfavorable impacts to gross profit from lower volume. The MD&A reductions was driven by cost mitigation actions take, the shifting of certain marketing spend and reduce discretionary spending, limited new hiring and travel restrictions. In additionally, we continue to deliver cost savings related to the revitalization plan. Turning to Europe, which is more heavily skewed towards the on premise, net sales on a reported basis, decreased 42.4% in constant currency due to lower volumes and lower net sales for hectoliter, reflecting the impact from the coronavirus. Net sales per hectoliter on a brand volume faces declined 12.7% in constant currency, driven by unfavorable channel and geographic mix, particularly the bigger impact to the high margin U.K. business, as well as slightly unfavorable net pricing. Financial volume decreased 24.8%, and brand volume, decreased 21.4% with only partial on premise opening seen during Q2 in some of our smaller European markets. Europe's underlying evidence of $31 million decrease 66.9% on a constant currency basis reaches the prior, driven by gross margin impacts of volume declines and cost inflation, partially offset by lower MD&A expenses as a result of cost mitigation action items falling the coronavirus pandemic as well as lower incentive compensation. In Europe, brand volumes were down 21.4% in Q2, driven back closures of on premise accounts, restoring full force at the beginning of the quarter and began to lift only in certain smaller markets in Central and Eastern Europe towards the end of the quarter. The U.K. did not reopen until July 4. Our relative share position in Europe is significantly higher in the on-premise channel than in the off-premise, so we expect to be disproportionately impacted by the closures in this channel and expect share losses during the shutdown period. In the off premise, we were initially not able to meet the full demand following the abrupt channel shift due to our level of capacity and actions particularly safety of our people, the business direction has increased significantly during the quarter as we have taken measures to increase capacity while not compromising on the safety of our people. Based on 2019 results, our on-premise business in Europe comprised approximately 50% to 55% of NSR, and a higher portion of our gross margin. While in the second quarter, nearly all of our sales in Europe were from off-premise. We are taking significant steps in reducing spending for both capital investments and expense and have taken steps around cash collections to minimize collection risk. As actions prolonged closures or limited reopening of the on-premise business will continue to have a meaningful impact on our European and total company gross margin and profitability, which takes me to our financial outlook. On March the 27th, we withdrew our guidance due to uncertainty driven by the coronavirus pandemic. With the continued spread of the virus and the release of certain on-premise reopening that uncertainty remains as a result, we have determined not to reinstate guidance at this time. The pandemic continues to impact our business due to on-premise losses across all our geographies and disproportionately in Europe. We take negative trends in volume, NSR, mixed and unfavorable fixed cost absorption in COGS will continue for the foreseeable future. The strength of demand in the off-premise has been unprecedented, but it has not fully offset the on-premise losses and while the current on-premise trends continue, we don't expect that any increase in total off-premise volumes, due to channel shifting will be sufficient to offset the on-premise losses. Also we expect the industry wide supply constraints on [Indiscernible] cans will remain an issue for us in Q3. However, due to our proactive, we expect domestic shipment trends in the U.S. to be higher than brand volume trends, as we build inventories for the balance of the year. As it pertains to MG&A, we expect our marketing investment to increase in the second half of the year in North America to support our core brands as well as innovations like [Indiscernible] and August launch of Coors seltzer. Some of the things will be dependent on a number of factors including the anticipated return of live sports. Finally, we also want to call out some unfavorable G&A means comparison as we will be starting lower incentive compensation, particularly long-term incentive compensation from the prior year in both the food in fourth quarter as well as a non-recurring vendor benefits in the U.S. in quarter four of last year. Notwithstanding the current environment, our continued desire is to maintain our investment-grade rating and we have taken a number of steps to ensure we protect our balance sheet and put ourselves in the best position to best navigate the coronavirus pandemic. As it pertains to our borrowing capability, during the second quarter, we repaid the full $1 billion that was outstanding on our $1.5 billion revolving credit facility or RCF. As a result, we had no borrowings on outstanding on our RCF at the end of the second quarter. We had approximately $200 million of commercial paper outstanding as of June 30th, 2020, resulting in available capacity under RCF at the 30th of June of $1.3 billion. In addition, in May 2020, we established a £300 million commercial paper facility for our U.K. business. We did not issue commercial paper under this facility in the second quarter and therefore had no balance outstanding at quarter end. Unlike the U.S. commercial paper facility, this UK facility does not impact the capacity of the RCF, but as an incremental £300 million borrowing capacity for our business. In June 2020, we entered in the main RCF which favorably revises the leverage ratios under the financial maintenance covenants for the next six fiscal quarters starting with June 30, 2020. Our near term liquidity position was further improved by Board decision in May to suspend quarterly dividend for the remainder of the 2020 fiscal year, as well as the benefits of the CapEx and cost reductions discussed on our first quarter call. During the first quarter we announced a reduction in 2020 capital expenditures by approximately $200 million and those reductions remain on target without sacrificing our ability to invest in necessary safety and maintenance projects as well as capital investments that delivery cost savings and high return growth initiatives, such as significant investments in hard seltzer in our Fort Worth brewery. Amidst the backdrop of this global pandemic, we are very pleased with our Q2 financial performance, our progress in improving liquidity, and efforts to advance our long-term goals for the business. While we are confident in our ability to achieve long-term success, we are mindful of the challenges and continued uncertainty that lie ahead. During this time of great uncertainty, our management and board will continue to take prudent and proactive actions which are in the best interests of the company, our employees, consumers, customers and our stockholders. Our decisions will be guided by, and consistent with the company’s overall financial discipline, ensuring adequate liquidity and our continued desire to maintain our investment grade rating. Our actions remain focused on doing what is best not only in the near-term, but positioning the business for medium and long-term success. With that, thank you for your time and attention, and I'll turn it back to Jamie for Q&A.

Operator Instructions] Our first question today comes from Kevin Grundy from Jefferies, Please go ahead with your question.

Hey, good morning everyone. And I hope that you're doing well. Gavin, I wanted to pick up on the company's hard seltzer strategy. Maybe we could talk a little bit about U.S. and then you mentioned international as well. So on the U.S. side, probably just the State of the Union, I have a number of questions with respect to Vizzy and where you believe that sourcing share and your early impressions there and market share potential for that brand? And then, as your rollout Coors Light, what have been sort of the learnings here with Vizzy launch. How do you intend to keep your distributors focused on both brands to hopefully ensure that both of them are success? And then just qualitatively, I wouldn't expect you to talk about how much you intend to spend behind it of course, but just qualitatively, maybe you can share with folks how big a priority it is for Molson Coors to be successful in this category? And then just a brief follow-up on Europe. Thanks.

Thanks, Kevin Good morning. And yep, we're all well here and also same applies side. Look, we've got a very clear strategies for hard seltzers are concerned. And we're being pretty smart about how we execute these two new entrants of ours. Obviously, first and foremost, we're focusing on Vizzy, which we launched in April and then Coors Seltzer, Kevin its not Coors Light seltzers, its Coors Seltzer in August. I think it's clear that this seltzers -- hard seltzers segments is going to be a huge segment, and there's room for multiple brands and multiple solutions. From our perspective, we're making sure that we've got very clear point of differences with our two entrants. So Vizzy, obviously has got a very clear point of difference with its acerola cherry which is high antioxidant vitamin C, and based on what we're seeing from consumers and the demand for this product, we're actually very confident that the proposition is, is resonating well and will continue to resonate well. And to that end, we kicked off a TV and video online campaign, this week so you know the early signs very promising. Coors seltzer comes in August. People are in this coronavirus pandemic turning to known and trusted brands and the Coors brand best fit -- is the best foot to play in a space based on our testing, particularly with its Rocky Mountain freshness and water heritage. And it's also got a clear point of difference, Kevin. It’s the first hard seltzer with a social mission, we're partnering with change, of course. And then on top of that it is a great tasting product just like Vizzy is. As far as sourcing is concerned, look I mean, it is coming from everywhere, obviously, but the majority of seltzer -- hot seltzer sourcing is coming from outside of beer, which is very positive for the beer category and beer segment. From within the beer category, we are seeing craft and flavored malt beverages as being big sources of that which is coming from the beer category. From a shelf space point of view, it should be coming from obviously underperforming items which right now would include craft and certain slower moving, FMBs [ph]. It shouldn't be coming at the expense of the faster moving economies and premium locks. As far as our spend is concerned well as Tracey said in the -- in her opening remarks, we are expecting to increase our marketing spend in the second half of the year versus the second half of last year, and you can assume that a decent chunk of that will be going behind our Vizzy and Coors seltzer launches. And then you said you had a follow-up on Europe?

Yeah. That -- you just mentioned that the company is pursuing the hard seltzer category in Europe as well. So White Claw has announced that they're investing in Western Europe truly seems to be domestically focused. Just perhaps comment on the opportunity, relative to the U.S. market and how big of an investment the company plans to make behind the category there?

Well, in Europe we have recently signed a deal with Miami Cocktail’s with -- you know, Bodega Bay its the first, one of the early entrants into the seltzer market there. I'm going to keep a little bit close to my chest some of our other plans around seltzer because we haven't been public about it in Europe, Kevin. But you can assume that we will be showing up there, beyond just bigger Bodega Bay.

Very good. Thank you, guys. Good luck.

Thank you. Operator: Our next question comes from Laurent Grandet from Guggenheim. Please go ahead with your question.

Hey, good morning, Gavin and Tracey. So two questions from me. The first one, regarding the UK, as the size of the UK entrants recovery is significant for your sales [ph] but online. Could you please give us [indiscernible] Europe reopening is happening. I know started -- reopening since July 4? And what’s the typical right level of inventory in that channel?

Thanks. So, as far as the onpremise in Europe is concerned, you can divide it up into Central Europe and Western Europe. Central Europe opened up – started to open up in the second quarter. And we quite quickly got above the sort of 50% level of pubs and restaurants were opening, but obviously they were at reduced capacity. And we've seen the, that sort of level -- level out in this – in the sort of 70% to 80% of pubs and restaurants opening. Volume impact is obviously greater than that because of the lower capacity and social distancing processes and procedures that they've got. Obviously, tourism has been very hard hit in Central Europe, particularly in countries like we operate in Czech Republic, Croatia, and so on. From a U.K. point of view, on-premise was pretty much non-existence for most of the second quarter. I think – started opening up on July 4th weekend and again same scenario, we have seen a decent proportion of on-premise and outlets reopen, but again at lower capacities and lower volume levels. As far as inventory is concerned in both the U.K. and Central Europe, our on-premise supply for kegs is not an issue at this point in time. Our constraint is more in the off-premise, which has seen a similar surge as we've seen in the North American business.

Thanks. And my second question is really about the U.S. and the academy and Lite beer segment. So as we're entering into a recession, we could expect consumer and actually some of your wholesalers are saying this that we trade down to more affordable brands. So, is it something that you can confirm. And do you have experience some past recession that you could share with us?

No, we haven't actually seen that this time around yet, certainly support for our premium lots both premium itself had been strong and we haven't seen a lot of trade down into the economy segment. Now that might still come given some of the actions which national governments have taken in terms of support for the – for unemployed folk, but we haven't seen that to date. In prior recessions we've actually have seen ongoing support for premium and above premium brands but at the same time as some focus have traded down. So at this point in time we're not seeing it.

Okay. Thank you very much. Good luck, guys.

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

Great. Thanks, good morning. First thing I was hoping to get some color on was the COGS per hectoliter in the quarter and how to think about that going forward. I know Trace you mentioned that you had a one-time benefit from the favorable property tax situation. But, you know, by my math that was, you know, not quite half but a good portion of the upside to earnings in the quarter, and so as we think forward and think about marketing going up to support all the innovation you're doing. I just wanted some perspective on how to think about COGS per hectoliter. Thanks.

Hi, Lauren. Yes, as we seen underlying COGS per hectoliter and constant currency increase by 0.4%. And so we had volume deleverage, which would account for around 250 basis points. And we also had the thank you pay, which we had a portion of that in the COGS line. And then offsetting there, the favorable resolution to the property tax appeal and was just under 100 basis points. And then obviously we had favourability coming from cost savings, as well. So, hopefully, that is huge – that is helpful for you. And just to notice – yes, just to notice Lauren, the 100 basis points for the property tax appeal is sitting in an unusual – sorry, that is an unusual and that's why we called it off.

So in the – the cost savings then were very, very strong, and the platform, so could you maybe just give us a little bit more color on your new productivity initiatives or things that were going on there that may well be part of the longer term restructuring plans. But, again, even if I ex-out that tax benefit, the costs were – actually would have come through, you know, much, much better, I think, than most people have modeled. And with the amount of volume deleverage there is. So how much that cost savings can prove sticky? Because that would give a lot of support to the P&L and EBITDA growth looking ahead.

Lauren, maybe I'll just give a couple of toplines and then Trace can add color to it. But, we're very pleased with how our revitalization plan is going, notwithstanding the circumstances in which were -- which were operating. I'm enormously proud of how all of our people, actually, but mostly the supply chain and procurement operations are functioning during what is clearly a very, very difficult time. Our breweries are operating as efficiently as I can remember them and I've been here for quite some time now. So, that is certainly helping COGS. And our revitalization plan, as far as cost goes, is on track.

Yes. I mean, we’ve mentioned cost savings around the $600 million for the next three years and as Gavin said, we’re well on track to hit the target.

Okay. That's great. And then, if I could just ask a second question. I mean, clearly, as you’ve said, you're making great progress with the transformation plan; we're seeing it in the COGS that we just talked about. But when we think about balance sheet and I know that you guys have -- there's been quite a bit in the media around, I quote, strategic review, there's been debate about Europe. I’m just wondering, if there's other assets you have that may not be strategic and could give you more flexibility from balance Sheet standpoint. So, for example, I believe you still have, I guess, one distribution business, which maybe is a bit of like a legacy position. And I'm just curious, if you're kind of thinking about non-core assets within the context of this transformation plan is, it may give you some more flexibility on the balance sheet.

Lauren, let me take that one. I'm just not going to get into engaging in all the rumors and hypotheticals and speculation that goes on outside of our organization. Our decisions that we're making right now to navigate the coronavirus and the global economic downturn have and will continue to be guided by the two principles I've spoken about first. Right? Putting our people first and mitigating the short term business risks. And then, secondly, ensuring that the actions we take today during this pandemic position our business to succeed in the long term. And as it regards our distribution company, we love our distribution company in Denver, it gives great learnings for us to help our sales folk and our operations folk, learn and be put in a better position to know what it's like on the other side of the desk, so to speak and just – we believe, makes us significantly better partners to our other distributors around the country.

Thanks a lot. I really appreciate it.

Sure.

And our next question comes from Andrea Teixeira from JPMorgan. Please go ahead with your question.

Thank you. And I hope all is well. My question is on the performance in states or markets that you have been seeing a resurgence in cases. And are you seeing the same level of the off-premise of uptick versus what you saw in March and April? And just a clarification on a point I made about marketing spending in the second half. Should we expect marketing to go back to the second half of 2019 levels so in other words flat year-over-year or even higher, due to the launches, especially as the seltzers launch, and should we see part of the sales in the first half go through or in other words like because it doesn't make sense to increase promotions now that at home consumption is so strong? Thank you.

Thanks, Andrea. So I'll take your second question first. At the beginning of the pandemic, we obviously took really quick action with our marketing spend in basically three ways, we right-size the overall spend. We delayed some spending on new products and we shifted media to consumer relevant channels with consumer relevant messaging. We made sure that we prioritized our spin behind our big trusted core brands like Blue Moon and Miller Lite and Coors Light. We did choose to delay some other significant spend behind certain products, due to change. The chain resets were delayed and consumer behavior in stores, just changed fundamentally, and we also shifted our media to channels like Twitch and YouTube and Reddit and Hulu, where our consumers were migrating to. In fact, we created a significant number of new programming at very short notice, like the Miller Lite’s virtual tip jar and the Coors Lights America could use a beer campaign which both of which connected extremely well with consumers. So our focus has been to maintain top of Top of Mind awareness for our for our big brands. As far as the remainder of the year is concerned, as we discussed and Tracey said, we expected – our marketing spend in the second half of this year to be higher than the second half of last year. So to answer your question directly we expect right now that the six months, remaining in this year will be higher than the in the second six months in 2019. We're going to make sure we've got strong pressure behind. Big trusted brands like Miller Lite and Coors Light. And we're going to draw a crowd n awareness behind our new innovations of Vizzy and Coors seltzer and Blue Moon – Blue Moon LightSky. But just as we've shown in Q2, we'll obviously monitor what's happening around us, and if things change, we've shown that we can, that we can pivot, our marketing as A - as appropriate. As far as your first question is concerned look it's quite a tough question to answer. We haven't seen that, a huge spike that we saw in that one week in March, but certainly the continued off premise trains in some of the states we've seen opening – openings and then closings again of on-premise outlook has continued,

And just to – this is super helpful, Gavin. Just to clarify, when you say the second half, like MD&A as in total or just marketing will be up, we'll just see to say that your cost savings that you just discussed in the prior question will kind of fund these increase or in other words should we say, margins will be under more pressure, or actually not so much pressure in the second half?

Couple of ways that I can answer that question, one is we're definitely going – based on what we know now we're going to increase our marketing spend in the second half our revitalization cost savings will continue to flow through, but as Tracy mentioned, there are some one off items which were beneficial to us in the second half of – of last year which won't obviously be in the second half of this year. So we're not giving a specific guidance on that, but that's broadly how you should look at it.

That's helpful. I'll pass it on. Thank you.

Our next question comes from Vivien Azer from Cowen. Please go ahead with your question.

Hi, good morning. Thank you. Gavin I was hopping to follow-up on a comment that you made earlier in regards to where you think hard seltzer shelf space should be coming from right here you correctly that you think craft should be shared donor?

Good morning, Vivien. And yes craft should be -- underperforming craft brands should be a shared donor. My comment really relates to the word underperforming, right. And there are number of underperforming craft brands that exist out in various channels and that should be a shared owner. The same would apply to slow moving underperforming flavored malt beverages.

Okay. That makes sense and curious, do you think that below premium should be share donor as well because it seems to be the leading laggard if you will, on a sub category basis? Thanks.

Not at the extensive faster turning sub premium economy brands Vivien. And we've always said all segments matter and they do, to an earlier question was, we haven't seen an impact of trade and one can assume that that will happen if the consumer spending unemployment remains fairly challenged into the back half of this year and into next.

That's helpful. Thanks. If I can squeeze one more. On Vizzy, any insights in terms of your underlying consumer demographics because we're starting to get some of that detail from your peers? Thanks.

Yeah, look Vizzy is being well received by all consumer demographics, but particularly by the 21 to 29 year old.

Very helpful. Thank you so much.

And our next question comes from Steve Powers from Deutsche Bank. Please go ahead with your question.

Yeah, thanks. Hey, guys. So you talked about this to a degree in the prepared remarks, but is there a way you could give us a little more color on the supply constraints that you're facing throughout the value chain as we stand here today. Maybe a bit more perspective on just how thin shell inventories are, as we enter August? And then ultimately your line of sight to be able to more fully catch up on that. Clearly you want to ship above consumption in the back half, but I just trying to get a little bit more sense for where we are today and what the magnitude of that might be as we progress through the to the next couple quarters?

Yeah. Thanks Steve. Good morning. Look, I mean, as I said in my opening remarks and as you referenced, right, we're producing and shipping can beer at significantly higher rates than we have in recent years. The demand for 12 ounce cans is just unprecedented and our competitors in the alcoholic and non-alcoholic space are seeing it as well. For us, this has been more pronounced for the 12 ounce tall slim can, and then also the strong success of Vizzy and Blue Moon LightSky that has also added to the pressure. We've addressed this in a number of ways. One is we have suspended production of slower moving products packaged in the 12 ounce cans, so that we can fulfill our faster moving packs. And we've had to adjust orders from wholesalers for some packages to balance supply levels across the country. We are seeing the situation begin to improve with respect to the 12 ounce industry standard can and so some of the slower moving products will start to turn those back on in the weeks ahead. But we do remain tight on the quiz like 12, talking. And that will probably continue impacting us through summer. It is, of course, dependent upon on premise closures or reopenings. We also did have some packaging supply constraints, specifically for paperboard, but our suppliers making progress. As far as they're concerned as well, so I think Tracy said in her opening remarks, I mean it is our intention to ship to consumption for the full year and -- yeah, I think that's about it.

Okay. That's helpful. If I could -- I mean it maybe little bit more theoretical, but just given where your balance sheets have stay in current leverage level, and your desire to remain investment grade, which is clear. Do you see any constraints at all on your ability to invest more aggressively than planned? If optimistically you get the sense of conditions unexpectedly improving. I’m just trying to get at whether or not there's a risk that you may have to be a bit more patient versus some of your more underleveraged competitors, which just could have place much is [ph] under pressure if we encounter such a point of demand inflection.

I don’t [ph] say it in a couple of ways. Tracey can answer the EBITDA ratios as it relates to the end of the second quarter on 12-month trailing basis and where we are. But, it certainly hasn't constrained us from investing behind what we think are going to be very successful entrance. And, a point to our Fort Worth expansion of both canning line and a filtration system that neither of those were necessarily planned into this year and we've made and have full board support to invest a meaningful amount of money behind our -- ourselves a portfolio. I think it's also you can draw the same conclusion from the fact that we're increasing our marketing spend in the back half of the year or that's our current plan is to do that based on current circumstances. So I think what I'm saying is we are quite willing and able to invest where we believe we need to invest to be successful for the long-term. That really plays, Steve, to my point about doing things in the short-term, but not hobbling us for the long-term. Do you just want to comment on our ratio for the...

Yeah. So I’m agreed we’ve been making an, obviously, really good progress and again even leverage ratio is obviously -- quarter-by-quarter is different. But, if I look at leverage ratio at the end of -- or our net debt-to-EBITDA ratio at the end of June, on a trailing 12-month basis, that we’re around 3.4 times. So, that's an improvement from the end of the year, the end of last year. So, we'll continue to focus on debt and debt paid on at leverage ratio as it is our desire to maintain our investment grade rating.

Great. That's all. Thank you very much.

And our next question comes from Bryan Spillane from Bank of America. Please go ahead with your question.

Thank you operator, and good morning, Gavin and Tracy.

Good morning.

Hi. So my question is just related to the marketing spend in the back half of the year, and I guess there's kind of two components to it. One is, there's a lot of companies across our food and beverage coverage universe, who are also planning to have plans to shift their marketing spend to the second half of the year. So, curious if there's a lot of demand for advertising channels, if that creating any kind of inflation or, competition for the airtime and maybe does it cost more? And then the second would be, even that you're not going to be spending a lot more in the back half of the year, just curious how you're thinking about the effectiveness of that spend given it being concentrated in a short period of time. So just how do you sort of, think about the return on investment or just how you're planning to spend just given that it's kind of unusual to have such a back catalogue plan?

Thanks, Brian. To answer your first question, no, we haven't seen that, I think, as many marketeers are upping their spend in the second half because it makes sense there are some industries where it still doesn't make sense. On Premise national trends would be an example, so the short answer is no, we haven't seen any impact from that perspective. The second part is the effectiveness of the spend and actually we saw some results in the late last week or earlier this week that showed that the marketing effectiveness on some of our programs in the second quarter was as high as we've seen them in quite some time and I'm referring to campaigns like the Miller Lite's virtual tip jar and Coors Light America could use a beer [ph]. So, marketing effectiveness and return on investments actually getting better not worse than I would expect that to be the case in the second half, given the programs that we've got coming.

Thanks. If I can just follow up on one more it. How much of the spending plans in the back half of the year are dependent on live sport -- coming back to a fuller schedule so like if the NFL ended up with a shorter season, or there's no NFL in for some reason in the back half. Would that at all affect your, your spending plan?

Yes, it would I mean it would probably affect how much we spend but it would also affect where we would spend. Our marketing team have been very nimble in second quarter adjusting on the fly, so to speak, given that we weren't expecting a pandemic and shifting our spend into place where our consumers are. So right now we're obviously expecting full NFL season and we've got majorly Baseball underway and hockey starting and the NBA starting. But that should change I've got to target, based on what they did in the second quarter I've got absolute confidence that we will be able to be nimble in the third and we would adjust to us been dependent on whether it was effective or not.

Thanks Gavin.

And our next question comes from Rob Ottenstein from Evercore. Please go ahead with your question.

Great. Thank you very much. I just want to kind of go back to a couple of big topics. The canned situation in hard seltzer so on the canned side could have you quantified or ballpark. What you think your last sales were in the quarter, due to out of stocks, and maybe remind us what percentage of your business las year was in canned and what percentage, it is this year and I'm assuming that's that you know movement to canned that’s driving that positive mix.

Thanks, Robert. Look I mean from a from a lost sales point of view. Now I'm not going to quantify that I mean obviously we have lost some sales. There's two methods of determining out of stocks right. Out of stocks that are at wholesaler and out of stock on the shelf and obviously the former tends to be higher than the latter because of the way the whole system works. So, I'm quite sure that we've that we have lost some retail sales, but consumers have been shifting between package types when they preferred package type is not available. I'd also pointed that we are shipping more canned beer then we have in many, many years, Robert. As far as the as the mix is concerned look, I'm not -- I think, I can refer you to historic numbers in our 10-K. As far as the can and bottling can that is concerned, I'm not going to get into that now. I just feel it's a little competitively sensitive right now. As you can assume that cans in Europe, we're pretty low in the second quarter and came off a lot in the North American business. The bottles for the same reason would have come off, because there's a strong on premise component too that as well. We are excited to say that our top ten fastest growing SKUs at the moment are canned.

Just in terms of dealing with the can situation, how much price increase do you think, you're going to have to see in the second half of the year or in the next year, given the extreme shortage on cans?

Yeah. Robin, we don't talk about pricing as it relates to the ideas, I would say to you though, our partners have been tremendous partners with us from a supplier point of view. And, also obviously, is, is an uptick in input costs to source can from South Africa, or from an Africa or from a Middle East. The aluminium price is also a bit of an offset to that. So our partners have been superb from this perspective.

Great, great. And then just one follow-up on, core seltzer, a tough, tough time of the year to bring in a new product. Can you talk about where retailers are in terms of their shelf sets and a getting a lot mixed messages on that front? Some suppliers saying, it's just not even going to happen this year. Others say they expect something in the fall. So I love to hear from you on that. And then, based on that around that, what is your sense of the kind of shelf space commitments that you're hearing from your top retail partners?

Yeah. Hey. It's not the easiest time to launch a new innovation. Robert you're right. But moving in Alaska and busy or off to and off to very strong starts notwithstanding that. The reaction that we've received from our retailers, particularly the chain customers for Coors seltzer sell throughs is very strong. I'm very pleased with the chain placements that we've that we've received. And if the initial orders from our distributor are any indication of success, then we're going to get off to a very strong start.

Terrific. Thank you very much.

And our next question comes from Bonnie Herzog of Goldman Sachs. Please proceed with your question.

Hi. Thank you. Good morning, everyone. I actually want to circle back on your marketing spend, just asked a few questions, but maybe asked a little differently. First, you pull back a lot in the quarter. So I guess I wanted to understand from you, if you see a potential risk, have a disproportionate negative impact on your top line in Q3 or maybe even Q4, since typically there is a lag effect on spending? I guess you guys see any signs of this so far. Maybe some color on your trends in July, would be helpful to hear.

Thanks, Bonnie. Look, when remember the MG&A cut is both North America and Europe. And so we have pulled back, the team in Europe has done a tremendous job prioritizing spend and pulling back spend based on fact that we do out of our index to the on premise in Europe. And obviously it was nonexistent in the U.K. for three months of the year. As far as hurting our brands? No, in fact, I have the opposite data, I think I said in response to an earlier question that the marketing effectiveness behind our corporate ends in North America is actually been -- has actually been very positive. And when you look at it quiz like segment share, I think it had its highest segment share ever in the second quarter. And Miller High Life deliver the 23rd consecutive segment share growth. So we're not seeing that; in fact, we're seeing somewhat of the -- of the opposite.

Gavin, can you share how your trends have been in July just to give you -- give us a sense of how the business has been trending as maybe, we're seeing some openings in the last few weeks, granted things are shutting down again. So just curious to hear how your business has been performing?

Yeah. Bonnie, we went off giving short term sales trends many years ago. We gave it last quarter because we thought it was helpful given -- right in the middle of the pandemic. But we don't, we don't believe that the short term trend is terribly helpful to the market. So we don't plan to give that.

Okay. And if just one final quick question, if I may kind of circling back on sort of the canned shortage situation. I'm just curious because you have a joint venture with Ball Corp, so it'd be helpful if you maybe could give us a little more color on that relationship. And if in fact it might be giving you a bit of an advantage during this difficult period for the entire industry because obviously it's an industry wide issue. So I'm just wondering how that may or may not help you just giving you again, your relationship with Ball Corp? Thanks.

Yeah, Ball has been a tremendous partner of us during this pandemic Bonnie, just like we’re constrained, they're constrained and they've helped us look for cans around the globe. So I can't say enough positive about our partners during this time. As far as our joint venture is concerned, they're primarily produces the Queensland toll and obviously the Keystone toll and we running that planters as hard and as fast as can. And it would be giving us an advantage at this point in time. But it is still very constrained, given the huge demand that we've had for peers like large packs, primarily that that plant is running effectively and efficiently.

All right. Thank you.

And our next question comes from Bill Kirk from MKM Partners. Please go ahead with your question.

Hi, thanks everyone. I know you won't give the July trends and that's fine, but maybe just help me with my math inter quarter for the reported period. If U.S. brand volumes started in April at minus 14 and ended at minus five, does that imply May and June were roughly minus one year-over-year, is that kind of the exit rate that you ended the quarter in for brand volumes in the U.S.?

Look, I think we can say that our global brand volumes did sequentially improve. And obviously, given that the first few weeks in July, we said was down 14 and we ended up at five. You can do the math as you've clearly done before, but we're not going to give month to month retail sales.

Okay. Thank you.

I am sorry, April, sorry, down 14 was April. Yeah. Operator: And ladies and gentlemen, with that, we’ll conclude today's question and answer session. I'd like to turn the conference call back over to management for any closing remarks.

Sure. Thanks you everybody. Again, thanks for joining us today. Just wanted to remind everyone and point to folks that our 10-K has been filed and has all of the details on our segment reporting as well as both U.S. GAAP and non-GAAP measures and then again, please -- looking forward to reaching out to all you. Please do not hesitate to reach us immediately. This is Greg Tierney again if you have any questions. Look forward to speaking to you soon. Thanks so much.

Ladies and gentlemen, with that will conclude today's conference call. We do thank you for attending. You may now disconnect your lines.