Molson Coors Beverage Co (TAP) 2020 Q2 法說會逐字稿

Good day, everyone, and welcome to the Molson Coors Beverage Company Second Quarter 2020 Earnings Conference Call. (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'll turn today's call over to Greg Tierney, Vice President of SP&A and Investor Relations. Please go ahead.

Thank you, Jamie, and hello, everyone. Following prepared remarks from Gavin and Tracey, we will take your questions. (Operator Instructions) In today's discussion -- includes forward-looking statements within the meaning 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. Company does not undertake to update forward-looking statements, whether as a result of new information, future events or otherwise. GAAP reconciliation for any non-GAAP U.S. -- non-U. S. 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 U.S. 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 2 main objectives as the world continues to adjust to the ongoing coronavirus pandemic. But before we talk about our second quarter performance, I'd 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've been unequivocal that we believe Black Lives Matter. And that's why we are backing up our words 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 U.S. operation by 25% by the end of 2023 across the country among salaried employees and also in leadership positions, improve our hiring practices and leader development programs to bring in highly skilled, diverse talent and develop our future leaders and much more. And we've already committed to donate $1.5 million 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, soon to be forgotten. We are committed to meaningful long-term change inside and outside our business. Our efforts to leave a positive imprint don't end there. 2 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, the fact that more than 99% of our packaging is now considered reusable, recyclable or compostable and an increase in the number of our zero waste-to-landfill facilities.

Addressing racism and protecting the environment are not societal issues to be addressed by someone else. It's on us to help build a better future. And doing so is good for our business and the communities in which we operate. The data 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 on the progress we are making today, as is evidenced by our strong second quarter results.

Last quarter, we told you that our overarching focus as the whole world deals with the coronavirus pandemic were centered on 2 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.

Through sound management and incredible work by our teams, we had a strong second quarter, executing well against these 2 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, so they can be ramped up in the back half of the year where we expect they 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, such as the continued problems facing suppliers with much more sizable 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 U.S. Blue Moon LightSky became the top-selling new beer of 2020 per Nielsen and it now ranks amongst the top 3 growth brands in the entire craft segment, also per Nielsen behind Blue Moon Belgian White. Vizzy has already made a name for itself in the increasingly crowded U.S. hard seltzer market. Despite not launching nationally until April, it is already the #3 seltzer in a number of markets, and is beating Bud Light Seltzer in repeat purchase rates.

Our Truss Canada joint venture shipped its first products, and we are very encouraged by the consumer reception. And in the U.S., our new joint venture, Truss USA, is already piloting opportunities for nonalcohol, hemp-derived CBD beverages in Colorado. We have driven progress in Canada through growth in craft in 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 BdM.

Our Canadian innovation portfolio is also off to a strong start with Aquarelle, a line of vodka-based canned drinks; AriZona Hard Green Tea; and Vyne, a nonalcoholic hop water. We became an early entrant in the European hard seltzer space by signing an exclusive agreement with British hard seltzer maker Bodega Bay. And we're extending beyond our beer portfolio after signing with Miami Cocktail Company to distribute their 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, a 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 this 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 were allowed to reopen, typically in phases, some of these would quickly close down again in the United States.

Consumer demand has shifted in ways no one could have foreseen 6 months ago. When bars and restaurants were shuttered in the early parts of Q2, demand for kegs in the U.S. went to 0. And conversely, demand for cans went through the roof. Every company that makes anything in a 12-ounce can has been challenged to some degree by the global can shortage. For example, Coke and Pepsi have acknowledged challenges and Ball Corporation announced new plans to increase production capacity on cans.

At Molson Coors, we have been producing and shipping canned beer at significantly higher rates than in recent years. But it hasn't been enough to meet the historically high orders we're seeing. To put a finer point in the level of demand we're seeing, we eclipsed July 4th week shipment days in the United States 4 times already this year. That's unheard of.

You'll remember on our Q1 call, I said constraints on 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 remain tight on the Coors Light tall can but are seeing the situation begin to improve with respect to 12-ounce industry standard cans. We are also making progress in securing more paperboard as our suppliers recently added to their production capacity, but they are still catching up on some SKUs.

Despite all of these obstacles, we continue to navigate the coronavirus effectively today while simultaneously working to position our business to succeed in the long term. There is no better example than our new investment, which is intended to quintuple our U.S. seltzer production capacity. Building on the strength of Vizzy's launch and the upcoming launch of Coors Seltzer, we announced the multimillion-dollar project at our Fort Worth, Texas Brewery, which includes 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 time when we expect it would 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 aisle. 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, we're the official domestic beer, the 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 extended 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 beer aisle.

And now I'll pass it over to 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 our 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 channels, which remained essentially closed during the quarter, along with the resulting negative mix indications across all major markets. Additionally, our under-shipment position in the U.S. continued during Q2 mostly due to the constrained supplies of 12-ounce cans as well as paperboard, that Gavin just mentioned. These impacts were partially offset by 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 locations had an adverse impact on geographic mix in Europe. And notably, as many of our higher-end products are skewed to the on-premise, the closure of these establishments had an unfavorable impact on brand and channel mix.

Worldwide brand volume decreased 11.6%, while financial volume decreased 12.5%, reflecting unfavorable shipment timing in the U.S. and lower contract brewing volumes. Underlying COGS 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 Brewery.

Underlying MG&A decreased 30.8% on a constant currency basis, driven by the suspension of on-premise activations and elimination and reduction of spend in areas that have been significantly impacted by the coronavirus, for example, sports and live entertainment events. We also adjusted the timing of marketing investments behind brands and packs where we experienced supply constraints. In addition, our G&A spend was lower as we delivered against our cost savings and revitalization plans. As a result, underlying EBITDA increased 2.2% on a constant currency basis.

Underlying free cash flow of $796.4 million for the 6 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 in 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 be paid in 2021.

In North America, net sales revenue decreased 7.9% in constant currency. This decline was driven by brand volume declines, unfavorable shipment timing in the U.S. and lower contract brewing volumes. North America brand volumes decreased 7.8% as the on-premise closures during the quarter more than offset the continued strength, particularly in the U.S. in the off-premise.

In the U.S., brand volumes decreased 5.2% compared to domestic shipment declines 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 increases. In Canada, negative mix more than offset the net pricing increases, while in Latin America, net sales per hectoliter on a brand volume basis also declined. Underlying EBITDA increased 13.8% in constant currency as MG&A reductions more than offset the unfavorable impact to gross profit from lower volumes.

The MG&A reduction was driven by costs mitigation actions taken, the shifting of certain marketing spend and reduced discretionary spending, limited new hiring and travel restrictions. In addition, 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 per hectoliter, reflecting the impact from the coronavirus. Net sales per hectoliter on a brand volume basis 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 volumes decreased 21.4%, with only partial on-premise opening seen during Q2 in some of our smaller European markets. Europe's underlying EBITDA of $31 million decreased 66.9% on a constant currency basis versus the prior year, driven by gross margin impacts of volume declines and cost inflation partially offset by lower MG&A expenses as a result of cost mitigation action items following the coronavirus pandemic as well as lower incentive compensation.

In Europe, brand volumes were down 21.4% in Q2 driven by closures of on-premise accounts, which were in full force at the beginning of the quarter and began to lift only in certain smaller markets in Central and Western 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 closure period. In the off-premise, we were initially not able to meet the full demand following the abrupt channel shifts due to our level of capacity and actions to protect the safety of our people, but this situation has improved 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. Despite these 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 27, we withdrew our guidance due to uncertainty driven by the coronavirus pandemic. With the continued spread of the virus and the reversal of certain on-premise reopenings, that uncertainty remains. As a result, we have determined not to reinstate guidance at this time. The pandemic continued to impact our business due to on-premise losses across all our geographies and disproportionately in Europe. And we expect negative trends in volume, NSR, mix 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 12-ounce cans will remain an issue for us in Q3. However, due to our proactive efforts to address this, 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 Blue Moon LightSky, Vizzy and the August launch of Coors Seltzer. Some of the spend 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 expense comparisons as we will be cycling lower incentive compensation, particularly long-term incentive compensation from the prior year in both the third and fourth quarter as well as a nonrecurring vendor benefit in the U.S. in quarter 4 of last year.

Notwithstanding the current environment, our continued desire is to maintain our investment 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 outstanding on our RCF at the end of the second quarter. We had approximately $200 million of commercial paper outstanding as of June 30, 2020, resulting in available capacity under our RCF at the 30th of June of $1.3 billion.

In addition, in May 2020, we established a GBP 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 U.K. facility does not impact the capacity of the RCF. So it adds an incremental GBP 300 million borrowing capacity for our business. In June 2020, we entered an amendment to our RCF, which favorably revises the leverage ratios under the financial maintenance covenant for the next 6 fiscal quarters, starting with June 30, 2020. Our near-term liquidity position was further improved by our Board's decision in May to suspend our 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 planned capital expenditures by approximately $200 million, and this reduction remains on target without sacrificing our ability to invest in necessary safety and maintenance projects as well as capital investments that deliver cost savings and high-return growth initiatives such as our significant investments behind hard seltzers in our Fort Worth brewery.

Amidst the backdrop of this global pandemic, we are 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 interest 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 for 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.

Gavin, I wanted to pick up on the company's hard seltzer strategy. So 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 a state of the union. I have a number of questions with respect to Vizzy and where you believe that's sourcing share and your early impressions there and market share potential for that brand. And then as you roll out Coors Light, what have been sort of the learnings here with the Vizzy launch? How do you intend to keep your distributors focused on both brands to hopefully ensure that both of them are a 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, Kevin. Good morning. And yes, all well here, and I hope the same applies to your side. Look, we've got a very clear strategy as far as hard seltzers are concerned. And we've been pretty smart about how we execute these 2 new entrants of ours. Obviously, first and foremost, we're focusing on Vizzy, which we launched in April. And then Coors Seltzer, Kevin, it's not Coors Light Seltzer -- it's Coors Seltzer -- in August. I think it's clear that this hard seltzer segments, it's 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 2 entrants. So Vizzy obviously has got a very clear point of difference with its acerola cherry, which is high in 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 resonating well and will continue to resonate well. And to that end, we kicked off a TV and video online campaign this week. So the early signs are 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 fit to play in the 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 the 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's coming from everywhere, obviously. But the majority of hard 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. It shouldn't be coming at the expense of the fast-moving economies and premium light.

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 you said you had a follow-up on Europe?

Yes. 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 Cocktails with Bodega Bay. It's 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 them in Europe, Kevin, but you can assume that we will be going up there beyond just Bodega Bay.

Our next question comes from Laurent Grandet from Guggenheim.

So 2 questions from me. The first one regarding the U.K. As the size of the U.K. on-premise recovery is significant for both your top and bottom line, could you please give us how fast the reopening is happening? I know it has been reopening since July 4. And what's the typical right level of inventory in that channel?

Thanks, Laurent. And so as far as the on-premise 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 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 nonexistent for most of the second quarter. Only solid opening up on July 4 weekend. And again, same scenario, we have seen a decent proportion of on-premise 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.

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

Laurent, we haven't actually seen that this time around yet. Certainly support for our premium lights, above-premium, seltzers has 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 are taking in terms of support for the -- for unemployed folk. But we haven't seen that to date. In prior recessions, we actually have seen ongoing support for premium and above-premium brands at the same time as some [folks] have traded down. So at this point in time, we're not seeing it.

Our next question comes from Lauren Lieberman from Barclays.

Great. The first thing I was just hoping to get some color on was the COGS per hectoliter in the quarter and how to think about that going forward. I know, Tracey, you mentioned that you had a onetime benefit from a favorable settlement on tax situation. But by my math, that was 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.

Lauren, yes. So as we said, our underlying COGS per hectoliter, constant currency increased by 0.4%. And so we had volume deleverage, which would account for around 250 basis points. We also had the "thank you" pay, which we had a portion of that in the COGS line. And then offsetting that, the favorable resolution to the property tax appeal was just under 100 basis points. And then obviously, we had favorability coming from cost savings as well. So hopefully, that is helpful for you. And just -- yes, just to note, Lauren, the 100 basis points for the property tax appeal is sitting in unusual -- sorry, that isn't unusual, and that's why we called it out.

Okay. So the cost savings then were very, very strong. And the [revitalization], could you maybe first give us a little bit more color on new productivity initiatives or things that were going on there that may well be part of the longer-term restructuring plan. But again, even if I ex out that tax benefit, the COGS per hectoliter would have come through 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 top lines and then Tracey can add color to it. But we're very pleased with how our revitalization plan is going, notwithstanding the circumstances in which we're 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 -- over the next 3 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, like you 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 the "strategic review." There's been debate about Europe. But I'm just wondering if there's other assets you have that may not be strategic and could give you more flexibility from a balance sheet standpoint. So for example, I believe you still have one distribution business which maybe is a bit of a legacy position. And I was just curious if you're kind of thinking about noncore assets within the context of this transformation plan. It may give you some more flexibility on the balance sheet.

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 2 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.

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 folks 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.

And our next question comes from Andrea Teixeira from JPMorgan.

My question is on the performance in the states or markets that you have been seeing a resurgence in cases -- and are you seeing the same level of the off-premise uptick versus what you saw in March and April? And just a clarification on a point that you made about marketing spending in the second half, should we expect marketing to go back to the second half of '19 levels? So in other words, flat year-over-year or even higher due to the launches, especially as the seltzer launcher -- launch. And should we see part of the savings in the first half flow through? Or in other words, like because does it make sense to increase promotions now that at-home consumption is so strong?

Thanks, Andrea. So I'll take the second question first. At the beginning of the pandemic, we obviously took really quick action with our marketing spend in basically 3 ways. We rightsized our overall spend, we delayed some spending on new products, and we shifted media to consumer-relevant channels with a consumer-relevant messaging. We've made sure that we prioritized our spend behind our big trusted core brands like Blue Moon and Miller Lite and Coors Light. We did choose to delay some of the 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 Virtual Tip Jar and the Coors Light America Could Use A Beer campaign, which -- both of which connected extremely well with consumers. So our focus has been to maintain top-of-mind awareness for our big brands.

As far as the remainder of the year is concerned. As we discussed and Tracey said, we'd expect 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 6 months remaining in this year will be higher than the second 6 months in 2019. We are going to make sure we've got strong pressure behind big trusted brands like Miller Lite and Coors Light. And we're going to drive trial and awareness behind our new innovations of Vizzy and Coors Seltzer and 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 pivot our marketing as appropriate.

As far as your first question is concerned, look, it's quite a tough question to answer. We haven't seen a huge spike like we saw in that 1 week in March. But certainly, the continued off-premise trends in some of the states where we've seen openings and then closings again of on-premise outlets has continued.

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

There's a couple of ways that I can answer that question. One is we're definitely -- well, 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 Tracey mentioned, there are some one-off items which were beneficial to us in the second half 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.

Our next question comes from Vivien Azer from Cowen.

Gavin, I was hoping to follow up on a comment that you made earlier in regards to where you think hard seltzer shelf space should be coming from. Did I hear you correctly that you think craft should be a share donor?

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

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

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

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

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

And our next question comes from Steve Powers from Deutsche Bank.

Yes. 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 channel inventories are as we enter August? And then ultimately, your line of sight to being able to more fully catch up on that. And clearly, you want to ship above consumption in the back half. But I'm just trying to get a little bit more sense for where we are there and what the magnitude of that might be as we progress through the next couple of quarters?

Yes. Thanks, Steve. Look, I mean, as I said in my opening remarks, and as you referenced, right, we're producing and shipping canned 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 in nonalcoholic 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 a 12-ounce can, 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 sort of slower-moving products, we'll start to turn those back on in the weeks ahead. But we do remain tight on the Coors Light 12-ounce tall can, 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 are making progress as far as that's concerned as well. So I think Tracey said in her opening remarks, I mean, it is our intention to shift to consumption for the full year. And yes, I think that's about it.

Okay. That's helpful. If I could, I mean, maybe this is a bit more theoretical, but just given where your balance sheet sits in, the kind of 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 guess I'm just guess -- I'm 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 under-levered competitors, which could place markets under pressure if we encounter such a point of demand inflection?

I'd answer that in a couple of ways. Tracey can answer the EBITDA ratio as it relates the end of the second quarter on a 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 entrants. And I point to our Fort Worth expansion of both canning line and a filtration system. 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 seltzer 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. You just want to comment on our ratio for that?

Yes. So Steve, look, we had been making, obviously, really good progress against leverage ratios. Obviously, quarter-by-quarter, it differs. But if I look at our leverage ratio at the end of -- our net debt-to-EBITDA ratio at the end of June on a trailing 12-month basis, we were around 3.4x. 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 paydown and leverage ratios. That is our desire to maintain our investment-grade rating.

Our next question comes from Bryan Spillane from Bank of America.

So my question is just related to the marketing spend in the back half of the year. And I guess there's kind of 2 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 in the second half of the year. So curious if there's a lot of demand for advertising channels, if that's creating any kind of inflation or competition for the airtime? And maybe does it cost more?

And then the second would be given that you're 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's 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 half loaded plan.

Yes. Thanks, Bryan. 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 chains would be, could 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 -- I saw some results either late last week or earlier this week, it 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 Virtual Tip Jar and the Coors Light America Could Use A Beer. So our marketing effectiveness and return on investment is actually getting better, not worse, and I would expect that to be the case in the second half given the programs that we've got coming.

And if I could just follow-up on one more. How much of the spending plans in the back half of the year are dependent on live sports coming back to a fuller schedule? So like if the NFL ended up with a shorter season or there's no NFL for some reason in the back half, would that at all affect 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. So our marketing team have been very nimble in the second quarter adjusting on the fly, so to speak, given that we weren't expecting a pandemic and shifting our spend into places where our consumers are. So right now, we're obviously expecting a full NFL season, and we've got Major League Baseball underway and hockey starting and the NBA starting. But that should change. I've got -- 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 our spend dependent on whether it was effective or not.

And our next question comes from Rob Ottenstein from Evercore.

Great. I just want to kind of go back to a couple of big topics, the can situation and hard seltzer. So on the can side, have you quantified or ballparked what you think your lost sales were in the quarter due to out of stocks? And maybe remind us what percentage of your business last year was in cans? And what percentage it is this year? And I'm assuming that it's that movement to cans that's driving positive mix.

Thanks, Robert. Look, I mean, from a lost sales point of view, no, I'm not going to quantify that. I mean, obviously, we have lost some sales. There's 2 methods of determining out of stocks, right? It's out of stocks that are at our wholesaler and it's out of stock on the shelf. And obviously, the former tends to be higher than the latter because of just the way the whole system works. So I'm quite sure that we have lost some retail sales, but consumers have been shifting between package types when their preferred package type is not available. I'd also point that we are shipping more canned beer than we have in many, many years, Robert.

As far as the mix is concerned, look, I think I can refer you to historic numbers in our 10-K as far as the can and bottle and kegs split is concerned. I'm not going to get into that now. I just feel it's a little competitively sensitive right now. But you can assume that kegs in Europe were pretty low in the second quarter and came off a lot in the North American business. And bottles for the same reason would have come off because there's a strong on-premise component to that as well. But it's safe to say that our top 10 fastest-growing SKUs at the moment are cans.

And 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 into next year given the extreme shortage on cans?

Yes. Robert, we don't talk about pricing as it relates to the outyears. I would say to you though that our partners have been tremendous partners with us from a supply point of view. And there obviously is an uptick in input cost to source cans from South America or from Africa or from the Middle East. The aluminum price has also been 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 Coors Seltzer. Tough time of the year to bring in a new product. Can you talk about where retailers are in terms of their shelf sets? Getting a lot of 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'd love to hear from you on that. And then based on that or around that, what is your sense of kind of shelf space commitments that you're hearing from your top retail partners?

Yes. It's not the easiest time to launch a new innovation, Robert, you're right. But Blue Moon LightSky and Vizzy are off to very strong starts, notwithstanding that. The reaction that we've received from our retailers, particularly the chain customers, for Coors Seltzer is very strong. I'm very pleased with the chain placements 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.

And our next question comes from Bonnie Herzog from Goldman Sachs.

I did actually want to circle back on your marketing spend. Just ask a few questions, but maybe asked a little differently. First, you pulled back a lot in the quarter, so I guess I wanted to understand from you if you see a potential risk of 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 are you guys seeing any signs of this so far? Maybe some color on your trends in July would be helpful to hear.

Thanks, Bonnie. Look, remember the MG&A cut is both North America and Europe. And so we have pulled back -- the team in Europe have done a tremendous job prioritizing spend and pulling back spend based on the fact that we do overindex to the on-premise in Europe. And obviously, it was nonexistent in the U.K. for 3 months of the year. As far as hurting our brands, no, in fact, I have the opposite data, as I think I said in response to an earlier question that the marketing effectiveness behind our core brands in North America has actually been very positive. And when you look at our Coors Light segment share, I think it had its highest segment share ever in the second quarter and Miller Lite delivered its 23rd consecutive segment share growth. So we're not seeing that. In fact, we're seeing somewhat 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.

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

Okay. And just one final quick question, if I may, kind of circling back on sort of the can 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 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 given, again, your relationship with Ball Corp.

Yes. Ball has been a tremendous partner of us during this pandemic, Bonnie. It's 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, that primarily produces the Coors Light tall and obviously the Keystone tall and we're running that plant as hard and as fast as it 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 Coors Light large packs primarily. That plant is running effectively and efficiently.

And our next question comes from Bill Kirk from MKM Partners.

I know you won't give the July trends, and that's fine, but maybe just help me with my math: intra-quarter for the reported period, if U.S. brand volumes started in April at minus 14% and ended at minus 5%, does that imply May and June were roughly minus 1% 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 volume did sequentially improve. And obviously, given the first few weeks in July, we said was down 14%, and we ended up at 5%. You can do the math as you've clearly done, Bill. But we're not going to give month-to-month retail sales. Sorry, April -- sorry, the down 14% was April.

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. Thank you, everybody. Again, thanks for joining us today. Just wanted to remind everyone and point 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 of you. Please do not hesitate to reach out to me. 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, we'll conclude today's conference call. We do thank you for attending. You may now disconnect your lines.