OFF THE LONG BIAS LIST (BUD)
We are removing AB InBev from our Long Bias list. We added the company to the list two months ago as we saw improving trends internationally combined with the prospect for improving margin trends in the U.S. driven by accelerating price increases. The Bud Light marketing mishap shocked us, but so has the resilient share price performance. We are taking advantage of that and moving to the sidelines. We still believe the international business is a more significant driver of 2023 results. Our thesis for the improvement outside the U.S. has not changed. However, Bud Light’s continued slide in the U.S. off-premise channel from a 1.6% decrease YOY in the week before the marketing blunder to a 26% decline in the week ended April 29 has us concerned that the necessary marketing campaign will be more costly than we anticipated.
Our rating change reflects a stock price that is relatively unchanged and numerous more questions about the sales and margin trajectory in the U.S. It is not a read on Q1 results or the larger international business which is inflecting. For additional details please see our separate note.
Q1 Beat (TAP)
Molson Coors reported Q1 EPS of $.54 vs. consensus expectations of $.26. The upside was driven by better sales growth which was pricing driven and the flow through to margins. Sales increased 8.2% in constant currencies with price and mix up 8.4% and volumes down 0.2%. The overall sales per hectoliter increased 8.4% in constant currencies, decelerating from 11.4% in Q4. In the Americas, sales grew 6.1% with price and sales mix per hectoliter increased by 7.1%. The company took prices higher by 5% twice in the U.S. with an earlier spring increase having a disproportionate benefit in Q1. In the EMEA & APAC region sales grew 7.6% with price and sales mix per hectoliter up 15.1%.
Volumes declined 1.2% in the U.S. despite an additional day in the quarter. In the U.S. the company also shipped 4% points above volume to build distributor inventory levels – a fortunate decision with the acceleration in sales in April. In Canada, volumes increased 4.9% driven by lapping Omicron. In Latin America, volumes decreased by 12.4% due to industry weakness. In EMEA & APAC volumes grew by 0.8%, but brand volume declined by 3.9%.
COGS per hectoliter increased by 7.4% in constant currencies. In the Americas COGS per hectoliter increased by 5.6%. Cost inflation was behind 80% of the increase due mostly to higher material, conversion, and energy costs. Mix was responsible for 20% of the increase due to factored brands in the UK as well as premiumization.
Management said they have not seen a meaningful trade down in the U.S. business, but there has been a shift from mid-sized packs towards larger packs and singles. Management did not factor the recent strength in U.S. sales benefiting from Bud Light share loss into the full year guidance. Management is still projecting LSD% sales and income growth for the year. Future upside to expectations from current trends in the U.S. continuing was part of the share price appreciation. Molson Coors is the biggest beneficiary of the current share losses from key rival Bud Light.
Selling it down (HLN)
Haleon’s CFO said in an interview with the Financial Times that the company will begin to sell its stake down within months in a “slow and methodical” manner. Pfizer still owns 32% of Haleon following the spinoff of its JV with GSK. GSK still owns 13.5% of Haleon. Similar to Kenvue, it has been understood that the parent companies would divest their stake in the Haleon spinoff sooner than later in a controlled way. Johnson & Johnson will be watching how the gradual sale impacts the share price performance of Haleon, which will likely have some influence over how Kenvue is divested (sale or distribution).
In your gut (KO, PEP)
In an interview with CNBC Olipop’s founder and CEO said the company will exceed $200M in annual sales this year, more than double last year. Olipop’s growth has been meteoric. The company was founded in 2017, had $1M in revenue in 2019, and $30M in 2021. Olipop is in the fast-growing functional soda category. The soda contains nine grams of fiber and prebiotics. Improving gut health is a selling point. Using celebrity investors as social media endorsers has helped it gain attention. The company’s has raised $55M in fundraising at a reported valuation of $200M. The CEO said both Coca-Cola and PepsiCo have expressed interest in acquiring the company. New brands can reach large sales targets quicker than ever with social media. There is a ceiling where the brands that have succeeded digitally and through digital marketing have to cross over into the mass distribution and media to continue to grow – just look at Zevia.
