Molson Coors Beverage Company - Q3 2023

Transcript

Operator (participant)

Good day, and welcome to the Molson Coors Beverage Company third quarter fiscal year 2023 earnings conference call. You can find related slides on the investor relations page of the Molson Coors website. Our speakers today are Gavin Hattersley, President and Chief Executive Officer, and Tracey Joubert, Chief Financial Officer. With that, I'll hand it over to Greg Tierney, Vice President of FP&A, Commercial Finance, and Investor Relations.

Greg Tierney (VP of FP&A and Commercial Finance and Investor Relations Officer)

All right, thank you, Britta, and hello, everyone. Following prepared remarks today from Gavin and Tracey, we will take your questions. In an effort to address as many questions as possible, we ask that you limit yourself to one question. If you have technical questions on the quarter, please pick them up with our IR team in the days and weeks that follow. Now, today's discussion includes forward-looking statements. Actual results or trends could differ materially from our forecasts. For more information, please refer to the risk factors discussed in our most recent filings with the SEC. We assume no obligation to update forward-looking statements. GAAP reconciliations for any non-GAAP measures are included in our news release.

Unless otherwise indicated, all financial results the company discusses are versus the comparable prior year period in U.S. dollars and in constant currency when discussing percentage changes from the prior year period. Also, U.S. share data references are sourced from Circana. Further, in our remarks today, we will reference underlying pre-tax income, which equates to underlying income before income taxes on the condensed consolidated statement of operations. With that, I'll hand it over to Tracey.

Tracey Joubert (CFO)

Thank you, Greg, and hello, everyone, and thank you for joining us. We will be doing things a little bit differently this quarter. I will open and address our results, our guidance, and importantly, our fourth quarter expectations at the start of the call, and then Gavin will close. In the third quarter, we delivered another set of strong results. Our net sales revenue grew an impressive 11%, driven by double-digit growth in both our business units. Our continued focus on efficiencies and cost savings, combined with volume leverage, significantly offset inflationary pressures, resulting in meaningful margin expansion. This led to 43.5% growth in underlying pre-tax income, with both business units up strongly.

And with free cash flow nearly doubling for the first nine months of the year, we continue to prudently execute our capital deployment plan, investing in our business, reducing net debt, and returning cash to shareholders. This performance underscores the strong momentum in our business, which is a function of the foundation we have built to sustainably grow both the top and bottom line. And this is exactly what we have done, both in 2022 and year-to-date in 2023, all while navigating a challenging and dynamic global macroeconomic environment. And while these macro conditions remain, the fundamental strengths of our business, coupled with the actions we are taking to sustain the momentum we have achieved, gives us confidence for another year of growth in 2023 and beyond. For 2023, we are reaffirming our high single-digit top-line growth guidance, but narrowing our expectations to the high end of that range.

We are raising our underlying pre-tax growth guidance to 32%-36%, as compared to 23%-26% previously. We are also reducing our interest expense guidance to $210 million ±5%, as compared to $225 million ±5% previously. All other previous guidance metrics, as detailed in today's earnings release, remains unchanged. There are a few key reasons for these guidance changes. First, the U.S. beer category has been healthier than we had projected when we revised guidance on August the first. In other words, its rate of decline is better than we had expected and better than it was earlier this year. Second, our brand volume growth is stronger than we had expected. In fact, we anticipate our global brand volume growth to accelerate in the fourth quarter.

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

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

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

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

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

In addition, we were cycling significant loading ahead of the 2022 forecast increases, and there was some shifting of calendar and holiday timing as compared to the prior year, which had an impact. Canada brand volume increased 0.2%, benefiting from growth in its above-premium portfolio. While industry softness weighed on brand volume, we continued to grow share in Canada for the quarter, adding over three share points for the three-month period ending August. In Latin America, while mix improved, brand volume was down 2.5%. This was largely due to industry softness and economic conditions in some of our key markets in the region. In EMEA and APAC, brand volume declined 5.2%. Consumers in Central and Eastern Europe continued to be affected by inflationary pressures, and UK demand was impacted by rainy weather.

That said, our above-premium portfolio continued to benefit from strong growth from Madrí Excepcional, which grew brand volume over 50% in the quarter. This strong top-line performance translated to even stronger bottom-line results, and this was across both business units, with underlying pre-tax income up 32.2% in Americas and up 58.1% in EMEA and APAC. We achieved this by prudently managing costs while continuing to invest strongly behind our brands. So let's talk about some of these drivers. Underlying COGS per hectoliter were up 2.6%. As expected, inflationary pressures continued to be a headwind, but moderated from the first half of the year. But the story differs by market. In the Americas, underlying COGS per hectoliter decreased 1% as cost savings, volume leverage, and lower logistics costs more than offset the impact of direct material inflation.

While in EMEA and APAC, inflationary pressures remained significant, driving underlying COGS per hectoliter up 15.8%. To break down the drivers a bit more, as you may recall, we bucket COGS into three areas. First is cost inflation/other, which includes cost inflation, depreciation, cost savings, and other items. Second is mix, and third is volume leverage or deleverage. The cost inflation bucket drove over 85% of the increase and was mostly due to higher materials and manufacturing costs, partially offset by cost savings. The impact of volume leverage had an 80 basis points benefit in the COGS per hectoliter in the quarter. Other costs per hectoliter drivers included mix, which accounted for the remainder of the increase and was largely due to geographic mix. Underlying marketing, general and administration expenses increased 11.6%.

About half of the planned incremental $100 million in marketing spend in the second half of 2023 was in the third quarter, and it largely went to supporting the momentum of our core brands. Our investments focused on retaining our existing drinkers and attracting new ones, including using addressable channels or places where we can use data to more precisely target them. And further, we continue to strongly invest behind live sports. Based on our brand health and share performance, we believe that this investment is working. Also, general and administrative expenses were higher. This is primarily due to incentive compensation expenses, which is a variable expense tied to our operating performance, and as you have seen, it's been a very strong year.

Turning to capital allocation, our priorities remain to invest in our business to drive sustainable top and bottom line growth, reduce net debt as we remain committed to maintaining and in time improving our investment-grade rating, and return cash to shareholders. With our greatly improved financial flexibility, we now have increased optionality among these priorities, and we will utilize our models to determine the best anticipated return for our shareholders. Looking at these priorities: First, we continue to invest in the business with paid capital expenditures of $494 million for the first nine months of the year. This was down slightly due to the timing of capital projects. Capital expenditures continue to focus on our Golden Brewery modernization and expanding our capabilities to drive efficiencies, cost savings, and sustainability initiatives. Second, we made further progress in reducing our net debt.

We ended the quarter with net debt of $0.4 billion, a decline of $584 million since December 31, 2022. This was supported by our July cash repayments of our $500 million Canadian debt upon its maturity on July 15. As a reminder, our outstanding debt is essentially all at fixed rates. Our exposure to floating rate debt is limited to our commercial paper and revolving credit facilities, both of which had 0 balance outstanding at quarter end. Given our strong EBITDA performance and lower net debt, our net debt to underlying EBITDA ratio declined to 2.2 times. This is in alignment with our long-term goal of under 2.5 times. And I would like to add that in October, S&P Global upgraded its credit rating for Molson Coors from BBB- to BBB.

That brings me to our third priority, returning cash to shareholders. We paid a quarterly cash dividend of $0.41 per share and maintain our intention to sustainably increase the dividend. As announced at our Strategy Day on October 3rd, our board authorized a new share repurchase program of up to $2 billion over the next five years. It replaces and supersedes the repurchase program previously approved by the board in the first quarter of 2022. The new program is intended as a mixture of sustained and opportunistic purchases as part of our balanced and cohesive approach to prioritizing capital allocation intended to improve shareholder value creation. In summary, we are extremely pleased with our third quarter performance and confident in our ability to sustainably deliver top and bottom line growth in the years to come. And with that, I'll turn it over to you, Gavin.

Gavin Hattersley (President and CEO)

Thank you, Tracey. In the third quarter, we continued the growth trajectory that we've been on for nearly two full years. In the quarter, each of our top three global markets are growing net sales revenue, volume, share, or all three. In the U.S., our shipments were up over 1 million hectoliters compared to the third quarter of 2022, and we were the top volume share gainer in the industry. Coors Light and Miller Lite are on track to collectively deliver net sales revenue growth for the third straight year, something they had not done since Miller and Coors came together in 2008. Coors Banquet volumes were up nearly 30%. Coors Light volumes were up double digits, and Miller Lite volumes were up high single digits. We were the top dollar share gainer in the U.S. economy segment.

In fact, our two biggest economy brands grew dollar and volume share of industry in the quarter. We have gained the second-most U.S. share of flavored alcohol beverages of all major brewers. We grew share nationally in Canada, in every region of the country and in every segment of our industry. Coors Light widened its position as the number one light beer in the country, a position it has held since March. The Molson brands grew share. Miller Lite grew volumes by 50%, and we grew more share in flavored alcohol beverages than any other company in the industry. We were the best performing brewer in the U.K. in both value and volume share. In some very exciting news from the U.K. market, we are now the number two brewer in London after ranking a distant number five player only a few years ago.

The transformation of our portfolio in the London market is a real testament to our team's commitment to a clear strategy that drives focus across all channels and customers.... Additionally, Madrí is now the second-largest above premium lager in the on-premise, and third-largest world beer in the total trade across the U.K. And in Central and Eastern Europe, Ožujsko, our core brand in Croatia, is growing value share of the beer category year to date, and it has over 50% value share of the core segment. Now, of course, our business has benefited greatly from the broader dynamics of the U.S. beer industry over the past seven months. But as you can see, the improvement in our business is being driven by more than one market. The improvement in our business is being driven by more than a couple of brands.

The improvement in our business is being driven by more than one segment of the category, and the improvement in our business predates April 1st. Year to date, each of the top three biggest global markets are growing net sales revenue, volume, and volume share. As this slide plainly shows, the trajectory of our business has been on the upswing. In regard to our future, we believe we can lap these results in 2024. We delivered top and bottom line growth in 2022. We're on track to do so again this year, and we plan to do so next year, too. That's the plan we outlined at our Strategy Day last month. We've already gained thousands of tap handles across the U.S. since the beginning of the second quarter.

We're already gaining significant amounts of shelf space this fall as retailers work to adjust their space to meet consumer trends. Now, I've seen some, let's say, interesting commentary around shelf space. So I want to be extra clear here. The vast majority of chain retail accounts typically update their shelf space once a year due to the complexity of lining all their stores, and they typically do so in the spring. Over 50 retailers have made space changes in late summer or fall due to the massive shift in consumer purchase behavior we have seen since April 1. This is not common. In fact, in the last 5+ years, we haven't had any adjustments in the summer or a change to the premium segment in the fall.

Among the chains that moved their resets up to the fall, Molson Coors was the biggest beneficiary, with Miller Lite and Coors Light gaining 6%-7% more shelf space. For brands of this size, that is a massive amount of space. In fact, it's tens of thousands of cubic feet of space. Regardless of how some folks might characterize the current environment, those are the facts. The conversations for spring resets are well underway, and while we can't exactly predict the future, it's safe to say that we expect to gain more shelf space for our big brands in those resets as well. These retailers are smart business people, and when consumer trends shift to the degree they are shifting, chain retailers have two options: change shelf space allocations to meet the trends or leave money on the table.

They're not going to leave money on the table. It's as simple as that. We'll have more to say about 2024 on our fourth quarter call in February, but between the work we have done to improve our business trajectory and the current dynamics in our industry, we'll feel - we feel confident in this year, confident in our ability to grow next year, and confident in our ability to grow in the years ahead. With that, we'll take your questions.

Operator (participant)

Thank you. As a reminder, if you'd like to ask a question, please press Star, then one, and we ask that you please limit yourself to one question, and then please get back in the queue. We now have Lauren Lieberman of Barclays. Your line is open.

Lauren Lieberman (Managing Director and Equity Research Analyst)

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

Gavin Hattersley (President and CEO)

Thanks, Lauren. Look, I mean, in Q1, the industry was down 2.7%, in Q2, it was down 2.5%, and in Q3, it was down 1.3%. That's in the USA, obviously, and it's per Circana. So, so an improvement, and, and, and as Tracey said, that, that wasn't the level of improvement that we were expecting to see. And obviously, hard seltzers are still a big, a big part of that, of that decline. You know, certainly, while some buyers are switching categories, and, and, and, and certainly our data says that, that some, drinkers have, have, have left within the category, you know, we're gaining share. Miller Lite, Coors Light are, are healthy and, and growing share strongly, and, and that share, has been stable for the last 25 weeks.

It's a structural change to the industry that is sticking, whether you look at it on a 1-week basis, a 4-week basis, a 13-week basis, or a 26-week basis, it's has stuck.

Operator (participant)

Next question, operator. Thank you. We now have Bryan Spillane of Bank of America.

Bryan Spillane (Managing Director and Equity Research Analyst)

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

Tracey Joubert (CFO)

Yes. Thanks, Bryan. So look, the free cash flow range that we gave was already quite wide, so we're comfortable just leaving it where it is. In terms of, you know, capital allocation, look, our priorities haven't changed. You know, it's those three buckets that we speak about. It is investing in our business to drive the sustainable long-term top and bottom line growth, and that could be, you know, investment in our breweries or, you know, from an M&A point of view, the sort of string of pearls approach. We will continue to reduce net debt with a desire to improve our investment-grade rating, and as I remarked, we did get an upgrade from S&P. And then, you know, returning cash to shareholders.

We did announce the $2 billion, up to $2 billion share repurchase plan over the next 5 years. You know, we'll consider all of those things. I think the good thing is, is that with our strong free cash flow delivery, we do have optionality as to how we can balance the allocation of capital behind these priorities. But as always, we'll run all of the ideas through our models and make sure that we're investing where we are driving the higher return for our shareholders.

Operator (participant)

Thank you. We now have Andrea Teixeira of JP Morgan.

Andrea Teixeira (Managing Director and Equity Research Analyst)

Thank you. I was just going to talk about a little bit of the share voice, and I think you in the analyst day, you obviously discussed that against the incremental spend this year. Is there any KPIs you can talk about as you're tracking the development of the incremental spend? And if there is anything, I know most of that $90 million, I believe, incremental spend for, if I'm not mistaken, in the quarter, it's mostly compensation, but wondering if it's gonna reaccelerate even further in the fourth quarter, so it sets you up for 2024. And on that, I was just trying to get, Gavin, you mentioned that your market share continues to be solid. I think one of your main competitors talking about Bud Light recovering a bit.

I know obviously from a very low base. Anything you, you would be expecting to see... I understand, obviously, you, you may not count on, on that being, you know, on that share gain being, structurally 100%, but most of it could be. So I was wondering if you can comment a little bit more on the market share performance that is baked in your outlook for next year. Thank you.

Gavin Hattersley (President and CEO)

Thanks, Andrea. Look, from a marketing point of view, we've-- we're focused on the quality and effectiveness of our marketing spend, versus the, you know, sort of level of spends that drive the best returns. We certainly try and make sure that every single dollar counts. We've got great tools that we've had for a number of years, which evolve, and they're there to design to make sure that we get the required marketing effectiveness. We know which creative assets are working hardest and which channels are working hardest, for that. So, you know, we're gonna continue to put the right commercial pressure behind our brands to support the momentum. I just want to correct, maybe correct you on one thing, right?

So the extra $90 million in the fourth quarter, there's about $50 million of that is the marketing, and that's part of the $100 million we said we're gonna spend on extra marketing in the second half of the year. So we spent, you know, $50 million of that in the third quarter behind really big beer drinking occasions like football, which we'll do again in the fourth quarter. And then, obviously, a large component of what's left is, as Tracey said, the employee-related costs. Look, as far as share gains are concerned, you know, our share position has been stable for the last 25 weeks.

It's a structural share change to the industry that we believe is gonna stick. And, you know, yes, I know there's been a lot of noise about trends changing and whether these results are sticking. So let me just share the facts, and these aren't our facts, these are this is Circana. And the fact is, total share for Coors Light and Miller Lite has stuck over the past 7 months. You know, through the latest 4 weeks of track channel data on a dollar change basis, Coors Light and Miller Lite both continue to put up double-digit growth. And at the same time, Bud Light has lost just under 3 dollar share points.

The overall portfolio for our biggest competitors lost under five dollar share points, and that's consistent if you look at the 4-week data, the 13-week data, and the 26-week data. In fact, Bud Light's actually getting worse. The brand's dollar share loss over the last 4 weeks was more than any 4-week period this year. And as I said, these aren't... I mean, this isn't a poll or possibility, right? This is the fact, as laid out in Circana, and we believe that the strength is gonna continue into 2024. And we're very confident in the position of our core brands in both the U.S. and obviously in Canada. We've got a very clear plan on how to keep these share gains.

We presented it to our distributors at our fall National Distributor Convention. We showed our plans, and honestly, the energy around our plans is something I have not seen, not only for Miller Lite and Coors Light, but for everything. We had a 95% positive score from our distributors. That has never happened. And we laid out the clear acceleration plan at our Strategy Day, on how we're gonna retain the share gains. So yes, we believe we can retain the share that has proven to be extremely sticky on every measure that we look at.

Operator (participant)

Thank you. We now have Peter Grom of UBS.

Peter Grom (Equity Research Analyst)

Thanks, operator, and good morning, everyone. Hope you're doing well. So I was hoping to get some thoughts on just kind of the underlying COGS per hectoliter, which was kind of the lowest year-over-year increase in quite some time. Maybe just first, can you just help us understand what's embedded in the guidance for the fourth quarter? I think you mentioned an increase in underlying COGS due to high inflation in the EMEA and APAC. Is that just an increase year-over-year, or is that an increase sequentially versus what we just saw in 3Q? And I know, you know, we're gonna get more details on 2024 in February, but maybe you can just give us some insight in terms of how you're thinking about some of the key cost buckets based on what we can see today. Thanks.

Tracey Joubert (CFO)

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

Operator (participant)

Thank you. We now have Bonnie Herzog of Goldman Sachs.

Bonnie Herzog (Managing Director and Senior Beverage and Tobacco Equity Research Analyst)

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

Gavin Hattersley (President and CEO)

Thanks, Bonnie. Yeah, look, without giving a complete look under the tent, for competitive reasons, obviously, we're gonna continue to drive strong pressure in the market with our very effective campaigns of Made to Chill with the Coors Light and Taste like Miller Time. You know, we've got significant increases planned and already executed in the third quarter and also in the back half of this year, especially behind, you know, the high beer consumption moments like football is. We're also gonna leverage targeted media and digital tactics to retain the new drinkers, which we've got into our brands, primarily Coors Light, Miller Lite, and Coors Banquet.

We've also got some innovation that's coming in the fourth quarter. Blue Moon Non-Alc is launching in December so that we're ahead of the dry January timeframe. And we're gonna you know invest to make sure that we get more space in store. So you know whether that's continuing to capitalize on the share that we've gained of displays. We've gained more than any other major brewer. We're gonna invest in appropriate areas to make sure that our retailers understand that the incremental shelf space and the tap handles that we're getting, that we're gonna support that with strong marketing. And then we're gonna invest in our EMEA-APAC business, you know, particularly behind brands like Madrí, Carling, and Ožujsko. So those would be the general directions and themes, Bonnie.

Bonnie Herzog (Managing Director and Senior Beverage and Tobacco Equity Research Analyst)

All right, thank you.

Operator (participant)

We now have Filippo Falorni of Citi.

Filippo Falorni (VP of Equity Research)

Hey, good morning, guys. I had a question-

Gavin Hattersley (President and CEO)

Good morning.

Filippo Falorni (VP of Equity Research)

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

Gavin Hattersley (President and CEO)

Thanks, Filippo. Trace, do you want to take the shipment question, and I'll take the sort of Circana or Nielsen number difference between ours and what you're seeing in track channels. You know, there's, I would say there's probably three big differences between the number we disclosed and the track channels. You highlighted one of them, which is the trading day adjustment. But then the other one is obviously the significant load-in that took place at the end of the third quarter last year, and which obviously we didn't have this year because we had that large price increase last year.

And from a track channels point of view, that measures consumer behavior, whether our brand sales represent sales that our distributors put into the retail stores. So the retailers would be buying ahead of the price increase. That doesn't necessarily mean that the consumer is buying ahead of the price increase. And those would be the two biggest differences between those two numbers, Filippo. From a shipments point of view, Tracey, do you wanna take that?

Tracey Joubert (CFO)

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

Operator (participant)

Thank you. We now have Vivien Azer of TD Cowen.

Vivien Azer (Managing Director and Senior Analyst)

Hi.

Gavin Hattersley (President and CEO)

Hi, Vivian.

Vivien Azer (Managing Director and Senior Analyst)

Good morning. The earnings seasons thus far, we've heard some cautious commentary from some of your peers around negative mix shifts, shifting to smaller pack sizes, some weakness in the lower-income consumer, more broadly. Student debt repayments obviously came October first. I know you guys are probably hesitant to comment on interquarter trends, but I was just wondering, Gavin or Trace, for some perspective on whether you're seeing similar dynamics, where there might be kind of more refinement in terms of spending, more choiceful spending? Thanks.

Gavin Hattersley (President and CEO)

Yeah. Thanks, Vivien. You broke up a little bit there, but I think I got the gist of your question. You know, from an overall consumer health point of view, we, we do remain cautious, given the, given the macroeconomic environment that, that is out there. We're particularly cautious in Central and Eastern Europe, which has been pretty consistent with, with our view for a while, right? I mean, the, the tough economy, the high inflation, has, has impacted our, Central Eastern Europe business, much more than our, our U.K. business, which is honestly more weather-related. We do, though, expect conditions to improve as inflation falls in, in, in Europe, and, and we are starting to see, inflation falling there. In Canada, we are seeing softness.

It's, you know, it's a tough economic environment out there. We're particularly pleased with our own performance in Canada, where, you know, we've really grown strongly. And actually, our shared growth in Canada is higher than it is in the United States. You know, in March, Coors Light took over as the number one light beer and has maintained that position, and even Molson's growing share of industry volume, and NSR. You know, in the U.S., we're still seeing premiumization with growth in RTDs and spirits, albeit at a slower rate because of the falloff in seltzers.

Consumers, to your point, are seeking more value through pack purchasing decisions, which they're making either into the larger pack sizes, like 30 packs, or into the smaller pack sizes, singles, and six packs. The on-premise is running, you know, pretty at pace with the off-premise business. You know, we haven't seen any material trade-down into our economy brands. If it happens, we're ready. I mean, Miller High Life and Keystone, in particular, are well-positioned and are showing very nice improvement, given where they were. So if it comes, we believe that the portfolio that we've got is ready for it. Thanks, Vivien.

Operator (participant)

We now have Rob Ottenstein of Evercore.

Rob Ottenstein (Senior Managing Director)

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

Gavin Hattersley (President and CEO)

Thanks, Rob. To your second question, I'll take that first. It is global. It's across the spectrum, not just the U.S. To your earlier question, you know, around, you know, what, why I believe and why we're confident that we're going to, you know, continue to deliver, I'm not gonna rehash the points I made earlier about our share position having been stable for the last 25 weeks and the gains we've made being very sticky. But I would say to you that over the last four years, Robert, you know, we made a lot. We made a number of statements when we launched our revitalization plan.

We said we'd streamline our company and deliver $600 million savings, and we did that. We said we would grow the top and bottom line of our business and by the end of this year, we will have done it two years in a row. We said we would strengthen our core brands, and we've done exactly that. We said we would become more than just a beer company, and we have become more than a beer company. We also said we would grow more of our portfolio in above premium, and we've done exactly that. Not just in beyond beer, but also in beer with a brand like Madrí. We said-

Rob Ottenstein (Senior Managing Director)

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

Gavin Hattersley (President and CEO)

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

Rob Ottenstein (Senior Managing Director)

I'm not sure that-

Gavin Hattersley (President and CEO)

Look-

Rob Ottenstein (Senior Managing Director)

There's no miscommunication.

Gavin Hattersley (President and CEO)

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

Rob Ottenstein (Senior Managing Director)

Thank you.

Operator (participant)

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

Nadine Sarwat (Director and Equity Research Analyst)

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

Gavin Hattersley (President and CEO)

Thanks, Nadine. Do you want to talk about operating leverage?

Nadine Sarwat (Director and Equity Research Analyst)

Yeah.

Gavin Hattersley (President and CEO)

Tracey, and I'll talk about the market share gains and the stickiness.

Tracey Joubert (CFO)

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

Gavin Hattersley (President and CEO)

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

Operator (participant)

Thank you. We now have Eric Serotta of Morgan Stanley. Your line's open.

Eric Serotta (Executive Director and Equity Research Analyst)

Good morning. Thanks for the question. So I've come back to U.S. brand volumes. You called out the double digits for Coors Light and Banquet and the high single digits Miller Lite. Your overall depletions are up kind of mid-single digits, which implies the rest of the portfolio was a lot lower. I realize a lot of those segments are not growing like the premium lights are growing right now. But can you give some color as to how you're as to your performance in the rest of the portfolio, either by segment or call out a couple of brands, and how that is tracking versus you know, three, six months ago? Thank you.

Gavin Hattersley (President and CEO)

Yeah, Eric, that was tough to catch the total drift of your question. But let me try. Obviously, there is the trading day adjustment we talked about. There is the timing of holidays, and there is the timing of the price increases that come into that. We obviously do have some tail brands which impact us. We are seeing some of the same trends as everybody else is seeing from a seltzer point of view, in particular. And you know, that's why you know, we've taken a much more broader approach to flavor. You know, the total flavor segment, seltzers, FABs, and RTDs, was about 5% of the category.

That number has tripled to about 13 now. It's a $9 billion business, but there's no question that seltzers within the flavor category is declining fairly meaningfully. You've seen that with our brands, and you've seen that with our competitors' brands. The data that we've looked at from a hard seltzer point of view shows that it provided an entry point into flavor for consumers. And once they discovered flavor, they started to experiment and trade into FABs and RTDs and so on. And that's why we built a diversified portfolio of brands. And from a performance point of view, we're very pleased with the performance in the flavor space. We're the number two share gainer for major brewers in FMBs.

We've got the number three and the number five hard seltzer in the category, or admittedly, a declining category. We've got the top innovation in flavor in 2021, 2022, in the summer of 2023. We've got Simply Spiked within that space, which is on fire. It's got nearly 5% of the FAB segment. And we're bringing new build and borrow brands to this space with the Peace Hard Tea and the launch of Happy Thursday. From a premiumization point of view, Peroni doing well. Blue Moon is, you know, operating in a challenged segment, as you've seen from a craft point of view.

It's still the number one brand in the craft segment, but we've experienced softness with Blue Moon, largely due to those craft category challenges. We've got a really clear plan in place of how we're gonna change that. We're really starting to see positive display trends, and we've got a big year plan for Blue Moon in 2024, which we unveiled for our distributors in September, and which they liked a lot, and that includes new innovation, which is coming, as I said, in December. And then finally in economy, yeah, it's a challenged segment, but we're the top dollar share gainer in the economy space.

So we're pleased with the performance of our two big brands there, Miller High Life and Keystone. So that's a walk around the park for you, Eric.

Operator (participant)

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

Chris Carey (Equity Analyst and Head of Consumer Staples Research)

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

Gavin Hattersley (President and CEO)

I'm sorry, what was the second question, Chris?

Tracey Joubert (CFO)

Competitive activity. Are you seeing anything?

Chris Carey (Equity Analyst and Head of Consumer Staples Research)

Competitive activity.

Gavin Hattersley (President and CEO)

Yeah.

Chris Carey (Equity Analyst and Head of Consumer Staples Research)

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

Gavin Hattersley (President and CEO)

Thanks. Chris, look, it's a bit of, it's a bit of everything there, right? So I mean, obviously, we did get strong pricing in our EMEA and APAC business. Obviously, it varies by country and is driven largely by whatever the inflation environment is in those countries. But from a mix point of view, you know, we've, we're getting strong benefits from, particularly, the continued very strong growth in Madrí Excepcional, which is an above-premium brand. And as I can't remember if it was me or Tracey that said it, but, you know, it's up 50% in the quarter, and it's continuing to grow strongly.

It's one of the primary reasons why we're the number two brewer in London, which was somewhat unthinkable a few years ago. So, you know, a large part of the overall UK business is now in the above-premium space, and it is accelerating. So that's part of it. You know, hard to tell where pricing is gonna land out in EMEA-APAC, and it does vary by country, and it is driven largely by the local dynamics. I do think it's safe to say that it's not gonna be at the historical levels that we've experienced over the last few years.

From a U.S. point of view, you know, from a price realization point of view, we put price into the markets that we were expecting to put it into in the fall. And, you know, as we've said before, I would expect, you know, pricing to fall back to more historical levels in the new year, the ones that go in spring. And from a shelf reset point of view, yeah, I guess everybody's fighting for space. The beauty of our position at the moment is that we've got the facts and the data to support, you know, meaningful increases in space for our brands. And the distri... The retailers that have gone in fall have given us, you know, tens of thousands of cu ft of space. You know, we're gonna fight for every sq ft of space based on those trends as we head into the spring resets. So thanks, Chris.

Operator (participant)

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

Greg Tierney (VP of FP&A and Commercial Finance and Investor Relations Officer)

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

Operator (participant)

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