Prepared remarks
Good morning, and welcome to the Molson Coors Beverage Company Second Quarter Fiscal Year 2025 Earnings Conference Call. With that, I'll hand it over to Traci Mangini, Vice President, Investor Relations.
Thank you, operator, and hello, everyone. Our discussion today includes forward-looking statements as defined by U.S. federal securities laws. For more detailed information, please refer to the forward-looking statements disclosure in our earnings release. Additionally, definitions for reconciliations of any non-U.S. GAAP measures are included in our earnings release. Our quarterly performance, including financial and operational metrics and drivers, is detailed in our earnings release and earnings slides, which were made available earlier today on the investor relations section of our website. We will focus our prepared remarks on what we believe are your main concerns, including the industry, our response, capital allocation, and our financial outlook. Given the current environment, we are providing a more detailed review of our guidance drivers for 2025 than we typically would. We will then take your questions. With that, I'll pass it over to you, Gavin.
Thank you, Traci. Hello, everybody, and thank you for joining the call. During the second quarter, we continued to execute against our strategic plans to support our long-term growth objectives and to return cash to shareholders while navigating a challenging and volatile macro environment. As a result of the uncertainty around the effects of geopolitical events and global trade and immigration policies, consumer sentiment in the U.S. has remained at relatively low historical levels. This has continued to pressure consumption trends. These macro impacts in the U.S. have had a disproportionate effect on the lower income and Hispanic consumer. And within beer, these consumer segments have driven the reduction in the number of buyers as well as spend with a shift to singles in the second quarter. In addition, while less impactful certain regions of the U.S. experienced some severe weather conditions during the quarter which had a notable impact on the important Memorial Day weekend.
These factors have resulted in a much softer U.S. beer industry so far this year than we had previously expected. Recall our guidance issued on May 8 had assumed the U.S. industry would improve for the balance of the year from down approximately 5% in the first quarter to levels closer to that of the last several years, which averaged down around 3%. But in the second quarter, the industry continued to be down around 5%. Further, the Midwest Premium pricing, which is a component of our aluminum cost has been indirectly impacted by recent U.S. tariff announcements, causing another substantial and unexpected spike in the second quarter. For perspective and as you can clearly see on Slide 19 of our earnings deck, in July, the Midwest Premium jumped to $0.68 per pound, an increase of over 180% since January. As a result of these macro drivers and to a lesser degree, lower-than-expected share performance, we are reducing our top and bottom-line guidance for 2025.
We now expect net sales revenue to decline 3% to 4% on a constant currency basis as compared to a low single-digit decline previously. The range assumes U.S. industry volume will decline between 4% and 6% for the second half of the year. We now expect underlying pretax income to decline 12% to 15% on a constant currency basis as compared to a low single-digit decline previously. The range includes for the second half of the year, incremental costs specific to the Midwest Premium of $20 million to $35 million which assumes a respective price per pound of $0.60 to $0.75. This is partly offset by lower expected incentive compensation given the change in outlook. As a result, we now expect underlying earnings per share to decline 7% to 10% as compared to low single-digit growth. However, we are reaffirming our underlying free cash flow guidance of $1.3 billion, plus or minus 10%, as we expect higher cash tax benefits and favorable working capital to offset the guidance decline for underlying pretax income.
Now Tracey will speak to our guidance in more detail in a moment. But first, I want to stress that we continue to view the incremental softness in the industry performance this year as cyclical, driven by the macroeconomic environment. And this belief in our view, is clearly demonstrated by the execution of our share repurchase program well ahead of our original expectations. While U.S. consumer basket sizes are smaller in the current environment, the percentage of alcohol in those baskets has remained the same. And legal drinking age consumers continue to engage with beer at similar levels across all generations and compared to historical levels, it's the occasions that are left. Recognizing this, our strategy was built to develop a portfolio that appeals to a wide range of preferences and captures more occasions. So as we navigate these macro pressures, we are continuing to execute the strategy and prudently invest behind our business.
To build on the strength of our core power brands, to premiumize our business in both beer and beyond beer and to develop and leverage our capabilities and partnerships to support profitable growth. In the U.S., our core power brands, Coors Light, Miller Lite and Coors Banquet have retained the unprecedented shelf space gains achieved in the spring of 2024. Collectively, they commanded a 15.2% volume share of the industry for the first half of the year. Recall that 3 years ago, these brands collectively commanded 13.4% of the U.S. industry. And what's clear in the scanner data, and as shown on Slide 20, is that these brands have held most of their share gains from the last 2 years through the second quarter. Banquet in particular, has been a strong performer. After 16 consecutive quarters of share growth, it was a top 5 volume share growth brand in the quarter. And given it's only about half the buying outlets of Coors Light, we believe there is significant distribution runway ahead.
In fact, Banquet gained over 15% distribution in the first half of this year, growing across every channel and on top of over 15% growth in the same period last year. In Canada, despite a challenging industry backdrop, the Molson family of brands with its deep Canadian roots posted another quarter of volume share gains. While Coors Light, which is proudly locally produced held its #1 light beer position in the industry. In EMEA and APAC, the industry in the U.K. has remained highly competitive, and in the Central and Eastern Europe region, it continues to experience softness related to escalating global, local political and economic tensions. But our brands like Carling in the U.K. and Ožujsko in Croatia remain segment leaders in their respective markets, which we intend to continue to support with targeted commercial plans. Turning to premiumization. As we have said for several quarters now, in the U.S., there has been a shift to value-seeking behaviors, but it has been focused on pack size rather than on brands.
And despite the pressure on the consumer, the industry continues to premiumize, albeit currently at a slower pace. So we remain committed to our premiumization plans, which are focused on both beer and beyond beer. Over the last few years, we have talked a lot about our premiumization successes outside the U.S. In EMEA and APAC, it's been fueled by hugely successful innovation with Madri, which we believe still has significant runway, both in its initial market of the U.K. and through recent geographic and brand extensions. In fact, in the latest 12 weeks, as of June 14, Madri had overtaken Peroni to become the #2 brand in the world's large segment and #4 beer overall in terms of value across total trade in the U.K. In Canada, premiumization has been led by the ongoing strength of Miller Lite and our flavor portfolio. But in the U.S., our largest market, we under-index in above premium, which makes it a big opportunity.
Our Peroni plans that began in the second quarter are starting to show positive results with the brand growing volume double digits in the last 13 weeks through July 27, supported by continued growth in chain and on-premise placements. And while smaller for now, we are encouraged by our innovations. Blue Moon Non-Alc continues its rapid growth, and we are seeing growing placements for our new higher ABV brands, Blue Moon Extra, Simply Bold, and Topo Chico MAX Margarita. These higher ABV brands not only support our push to expand in C-stores but are particularly timely given current value-seeking behaviors. And while these innovations are helpful to their respective brand families, we recognize the challenges of their big flagship brands and are focused on stabilizing them. For example, with Blue Moon, we have completed the pack size conversion from 15 to 12 packs. This was a near-term volume headwind, but it's very positive for margins.
In the on-premise, which is a big channel for Blue Moon, we saw dollar share trend improvement during the second quarter. And in the third quarter, we have been ramping up a new national advertising campaign with comedian Colin Jost. And then there is non-alc. Fever-Tree is now our highest NSR per hectoliter brand aside from full-strength spirits. While we began to consolidate Fever-Tree into our financials in February, we only completed the distribution network transition in June. And the incoming distributors are very excited about the opportunity to significantly expand Fever-Tree's presence across both existing and new channels and buying outlets. It's early days, but the brand has already contributed meaningfully as the key driver of positive brand mix in the Americas. And while Fever-Tree is already the world's leading supplier of premium carbonated mixes with the #1 tonic and the #1 ginger beer by value in the U.S., we believe we can accelerate its growth in the U.S. over time by leveraging the scale and strength of our distribution network, combined with our marketing capabilities.
Now before I pass it to Tracey, I'll sum it up to say, it's been a difficult start to the year, but we viewed beer as resilient. And amid a challenging macro backdrop, we are focusing on what we can control to position our portfolio and our business for long-term success. That means keeping our core power brands healthy, continuing to premiumize in EMEA and APAC and Canada and successfully executing our plans in the U.S. Leveraging our deep capabilities across our organization to support premiumization and focused innovation, supply chain efficiencies, and commercial effectiveness. And utilizing our enhanced financial flexibility to prudently invest in our business and return cash to shareholders. And with that, I will pass it to Tracey.
Thank you, Gavin. We are very pleased with the health of our balance sheet and our strong cash generation. And this is particularly important during a challenging macro environment as it allows us to continue to invest behind our brands to help ensure their long-term health, to continue to make capital investments that support our growth initiatives and cost savings plans and to not only pay what we view as a competitive dividend, but also execute a meaningful share repurchase program as we continue to believe our stock is a compelling investment. In fact, we have raised the quarterly dividend each year since 2021, and we have actively executed our current share repurchase plan since it was announced in October 2023. We have repurchased 9.4% of our Class B shares outstanding. It's an up to 5-year $2 billion plan, and we have utilized almost 55% in under 2 years. For perspective, if we had executed it on a straight-line basis, we would have only utilized 35% of the plan so far.
With that, let's discuss our financial outlook. First, the impact of the global macro environment is multifaceted and difficult to predict. And while we have included in our guidance, our best estimate of some of these factors, external drivers may significantly impact our actual results either up or down. As it relates to tariffs, as we have previously said, while we are a global business, our products are generally made in the markets in which they are sold and with locally sourced ingredients. So we don't expect material direct impact from the known tariffs on our input costs. That said, tariffs do have indirect impacts, particularly the recent spike in the Midwest Premium pricing. While our extensive hedging program can help to mitigate some of the impact due to the guardrails of our program, we are never fully hedged. Further, given its opaque pricing and at times limited liquidity, hedging the Midwest Premium can be difficult and expensive.
And for these reasons, the Midwest Premium is one of the commodities for which we currently have the least amount of hedge coverage. With that, let's discuss the drivers of the guidance Gavin outlined. Our top-line guidance range now assumes the U.S. industry is down 4% to 6% for the second half of the year. Our price mix assumptions are unchanged. We expect an annual net price increase of 1% to 2% in North America, in line with the average historical range. We expect mix benefits from cycling contracts growing from 2024 as well as from premiumization. We expect to grow above premium net brand revenue in EMEA and APAC and Canada as well as make progress on our U.S. above premium initiatives. Fever-Tree and the consolidation of ZOA are incremental to the top line, but we are also starting the divestiture of the smaller regional craft breweries in the third quarter of 2024. And more significantly, 2024 Pabst and Labatt contract brewing volume as these contracts terminated at the end of last year.
We expect the related Americas contract brewing headwind to be 1.9 million hectoliters in 2025. In the first half, we cycled over 1.1 million hectoliters, and we will cycle over 450,000 hectoliters in the third quarter. Also, last year, we had higher than typical first half inventory build related to the Fort Worth strike, which ended in mid-May. As a result, STWs outpaced STR by 1.1 million hectoliters in the first half of last year. This year, STWs outpaced STR by 800,000 hectoliters in the first half. So year-on-year, we had an approximate 300,000 hectoliter shipment timing headwind in the first half that we expect to reverse in the second half and mainly in the third quarter. Note that we did have some shipment trend catch-up to STRs in the second quarter, which had an approximate 150 basis point positive impact on U.S. financial volume in the quarter. We had previously not expected to build higher than last year given the cycling of the Fort Worth strike.
We were able to ship further ahead of STRs than expected due to the softer-than-anticipated industry demand. For a detailed review of these U.S. shipment trends, please refer to Slide 21. Moving down the P&L. We expect mix benefits from lower contract brewing and increased premiumization as well as productivity improvements and cost savings to now be more than offset by higher volume deleverage given the industry volume trends as well as higher Midwest Premium costs. For the full year, this would result in Midwest Premium costs exceeding the prior year by $40 million to $55 million. We now expect MG&A to be down slightly for the year as we now anticipate lower incentive compensation due to the adjusted outlook for this year. Also, and to a lesser degree, the Fever-Tree one-time transition and integration fees were less than expected, totaling approximately $50 million in the first half of the year.
Again, these fees will be recovered through net sales over the next 3 years beginning in June. As for marketing, our plans are unchanged. We intend to continue to put the right commercial pressure behind our key brands and innovations, including our core power brands, Peroni, the Blue Moon family, Madri and our non-alc portfolio. While marketing investment was down in the second quarter, cycling up spend in the prior year period, we expect it to be up in the third quarter due to the timing of our commercial plans and lower spend in the same period last year. As a result, we expect marketing investment in the peak summer months to be consistent with prior year period levels. We are also slightly adjusting our net interest expense outlook. We now expect $225 million, plus or minus 5% as compared to $215 million, plus or minus 5% previously. This is driven by lower cash balances, including the impact of higher share repurchases as well as foreign currency impact.
And lastly, we are reaffirming our underlying free cash flow guidance of $1.3 billion, plus or minus 10%. In closing, with a strong global brand portfolio, healthy balance sheet and strong cash generation, we are confident in our ability to navigate these challenging times while supporting the long-term health of our business and brands. We are committed to protecting and growing our underlying free cash flow while making prudent capital allocation decisions that support our growth initiatives and allow us to return even more cash to shareholders. With that, we will take your questions.
Questions and answers
Our first question today comes from Peter Grom with UBS.
Thank you, operator, and good morning, everyone. I wanted to discuss the updated guidance and get a clearer understanding of the various factors at play. The top line is facing some pressure, which is evident in the data. Can you elaborate on the profit challenges, especially concerning aluminum and the Midwest Premium? Additionally, as we consider the second half of the year, how does the updated guidance affect performance? Also, although it’s still early, are there any considerations we should keep in mind as we look ahead to fiscal '26?
Thank you, Peter. I value your question. From an updated guidance perspective, there are three key points that we did not foresee since our last discussion. Firstly, the industry did not improve as we anticipated. We had hoped it would return to a decline of around 3%, similar to the previous years, but it hasn’t. Additionally, while we maintain that the macro environment and consumer confidence are cyclical, we haven't observed any indications of change for the remainder of the year, especially in the second quarter, which was a significant factor. We also did not foresee the substantial 180% increase in the Midwest Premium, which we have discussed extensively. Tracey can elaborate on the challenges around hedging and forecasting related to this issue. It certainly adversely affected our Q2 projections. Moreover, our share performance fell short of expectations. The first two factors are largely out of our control, while the third, concerning share performance, is something we could influence.
Our share performance remained relatively unchanged from Q1, even though we expected an improvement. We believe our share performance estimate was slightly more favorable than what might be reflected in Circana due to better on-premise results. We estimate that we lost about 50 basis points of share in the second quarter, and we have made similar assumptions for the remainder of the year. We are making considerable efforts to improve this. From a guidance perspective, we anticipate only minor changes in our share performance for the second half of the year. Overall, looking longer-term, we remain confident, as mentioned earlier, that the present industry downturn is cyclical. Consumer confidence will rebound, although the timing is uncertain. The Midwest Premium will return to more typical levels following these extreme fluctuations, both of which have negatively impacted our business this year.
We have a robust balance sheet and have generated strong cash flow, as noted by Tracey, and our updated guidance remains consistent. We are pleased with how we have maintained most of our market share for our core brands. Coors Banquet is performing exceptionally well. Our non-alcoholic strategy, especially following the acquisition of Fever-Tree, is taking shape, and this will contribute positively in the second half and into next year. This also enhances ZOA's visibility. Peroni’s initiatives took off in the second quarter, and the brand is thriving. In Canada, we are holding steady in market share, with Molson Canadian and Miller Lite performing well, along with Coors Original, as we approach next year. Our premiumization strategy in EMEA and APAC is doing quite well, with Madri leading the charge. For the balance of the year, we expect contract brewing challenges to diminish as we move towards year-end, and by the fourth quarter, we don't foresee significant headwinds from Pabst.
While we still have the FIFCO headwind, that will also be resolved next year. Tracey discussed shipments in the latter half of the year, and although some were shifted into the second quarter unexpectedly due to retail sales performance, we anticipate receiving the bulk of it in the third quarter. In EMEA and APAC, we foresee improved top-line performance in the latter part of the year given the current environment. Tracey, is there anything I missed?
No, I think you covered it all.
Our next question comes from Chris Carey with Wells Fargo.
I wanted to follow up on a couple of areas there. One is just a clarification. Tracey, the impact from Midwest Premium increases that you're expecting for the year. Have you seen any of those increases in Q2? Or is that all in the back half of the year? I'd just say that in the context of the Americas, inflation in the quarter was fairly paltry. So I just wanted to confirm that piece and how we think about aluminum inflation perhaps more on a 12- to 18-month timeframe. And then just following up on the overall category. I think there are certainly a number of reasons why we may view what's going on cyclically? A lot of categories and consumer are dealing with sluggish trends. The question I would have, though, is volumes in the beer category have been soft going back to 2022. Obviously, the category leader dealt with a pretty substantial headwind, but nevertheless, I wanted to just test that confidence level around this being cyclical versus perhaps changing in consumption and habits and how you reconcile or get comfortable with that concept and it's kind of a category that's been a bit softer over the past few years. So thanks on those. Appreciate it.
Thanks, Chris. Tracey, if you wouldn't mind taking the Midwest Premium one, I'll talk a little bit more about the category and our belief in it. Look, I think from a consumer confidence point of view and the impact that had on consumers in a number of different ways, Chris, took place towards the back half of January and early February, right? And I mean, it's clear that consumer confidence took a hit at that time and frankly, hasn't recovered. So we continue to believe that over time, that will change. I mean, it could be sooner rather than later, or it could be in the same time period next year. The items that have been impacting the overall alcohol category, like I've often heard GLP-1s talked about. I mean we don't have a lot of data that suggests that that's having any meaningful impact on either the alcohol category or our category at this point. The other item that gets talked about is D9. And I think the impact of D9 does vary by market. And in some markets, it's not sold. In others, it carries strong restrictions. And so that's certainly an area that we continue to monitor the impact of that. I think consumer confidence has had a disproportionate impact, as I said, across some consumers differently to others. And again, we believe that, that is cyclical. Tracey, do you want to add anything on Midwest Premium?
Yes, so Chris, no one anticipated the Midwest Premium to rise by 180% since the start of the year. Although we are somewhat hedged, it's challenging and costly to hedge in this situation. We have the least amount hedged for this commodity. Looking ahead for the remainder of the year, we expect an additional impact of $20 million to $35 million from the Midwest Premium, which translates to about $0.60 to $0.75 per pound. The total impact for the full year is estimated to be between $40 million and $55 million. This figure solely pertains to the Midwest Premium. In terms of other commodities, our hedging program is very costly, and we foresee minimal effects from tariffs. However, the indirect effects, especially regarding the Midwest Premium, present a significant challenge because it’s hard to hedge and does not align with typical market behaviors.
To conclude on the industry, Chris, our acceleration claim strategy aims to target certain areas where we see potential opportunities. Our beyond beer strategy, which includes both non-alcoholic beer and other non-alcoholic options, closely connects Fever-Tree mixers with alcohol. This is a focus area for us, and we feel optimistic about the early progress with Fever-Tree. Our innovation and brand portfolio strategies are crafted to respond to the evolving consumption habits of consumers and their varying occasions.
Our next question comes from Andrea Teixeira with JPMorgan.
Gavin, I appreciate your comments on the consumer confidence potentially improving. Now I'm curious to see if you're seeing any green shoots because all we hear from your peers and retailers is that, obviously, with inflation hitting harder in the second half with tariffs, we could see things getting worse before they can get better. So can you comment on the exit rate for consumption in North America and Europe? I know from your slides, and I appreciate the details there, you're still running STWs against STRs at a higher level. So I was hoping to see if you can help us with the cadence as we incorporate your new guide.
Tracey, would you like to discuss shipments? I'll share insights on consumer health across different markets. In the U.S., Andrea, honestly, we've not noticed an improvement in consumer confidence or behavior. We're still observing value-conscious consumers making some shifts in channels and pack sizes, as we've seen previously, with an increase in single and large pack purchases and fewer mid-sized packs. This trend continues. We cater to a wide range of consumer demographics across various income levels with our product lineup, which we believe addresses everyone’s needs. So, there hasn't been much change; the overall environment is affecting all consumers to some extent. We see that Hispanic consumers are particularly affected by the current macro environment. In Canada, inflation has eased, but consumers are still cautious about spending due to ongoing worries about housing and food costs.
While interest rates have stabilized, there are broader concerns regarding trade tensions and tariff-related repercussions. As a result, the beer industry volumes in Canada have followed a trend somewhat similar to that of the U.S., but they have performed slightly better. In the U.K., the consumer confidence index remains negative, although we noted a slight improvement in May, reflecting a somewhat more optimistic view of the economy. However, overall sentiment remains cautious. In Central and Eastern Europe, consumers are likely being affected more significantly due to major political and socioeconomic challenges in those markets. That's an overview of our markets and the state of consumer confidence. Tracey, what about shipments?
Yes. So in terms of the first half of the year, our shipments did outpace our sales to retail by about 800,000 hectoliters in the first half. So there's about a 300,000 hectoliter to reverse in the second half of the year. Most of that will be in Q3 and as always, we plan to ship to consumption. So we expect that to converge but as I say, mainly in Q3.
Our next question comes from Bonnie Herzog with Goldman Sachs.
I just had a quick question on pricing and then the promotional environment. I guess, given the pressures on the category and consumers, how are you thinking about pricing for the remainder of the year? Also, what about the promotional environment? Are you seeing signs of levels increasing recently and how you expect that to play out?
Thanks, Bonnie. Look, I mean it's quite common to see heightened competition with strong promotional activity during the summer. And you see that easing up in the shoulder months. And we've seen that in prior years, and we're seeing that again. And again, we just take a strategic approach to how we evaluate the competitive environment. From an overall pricing point of view, the historical average, as we've said before, range is in that 1% to 2% range. And we expect that to fall within that range again this year. Whilst we have seen the impact of the economy, consumer confidence having consumers searching for full value, any trading seems to be coming in channel and pack shifting, not necessarily in segment trade-down.
Our next question comes from Filippo Falorni with Citi.
I wanted to follow up on the margin question on the Midwest Premium for the second half. If I take the, call it, $20 million, $35 million incremental Midwest Premium cost is still a relatively small headwind to margins. So maybe, Tracey, can you talk about like the other drivers of the big margin contraction that is embedded in your guidance in terms of volume deleverage, SG&A for the back half of the year? And then just a follow-up on top line, Gavin, you mentioned the on-prem is performing better than what we see in track channel data. So can you give us a perspective of how July played out relative to your expectation, including the on-premise business? We see still soft trends, especially around the 4th of July in track channels, but I'm curious the total company and total industry trends, including on-premise.
Tracey, you'll handle the margin one. I'll just quickly deal with July and the on-premise. I mean look, from a July point of view, as we say every time on these calls, right, we've only got a few weeks of the following quarter in the books. So let's see what happens for the balance of the quarter from an overall industry and our performance point of view. From an on-premise point of view, I know we've talked a lot about Blue Moon over the last couple of years. And we are starting to see improvement in the on-premise. Belgian White's STR trends improved 6 points in Q2 versus Q1, which is very encouraging given that brands are built and expand from the on-premise out. So we're pleased with that. Peroni is obviously playing a role in that as we implement the plans we've talked about for a while now, which kicked off in Q2. So that's been a positive catalyst for us as well. And then Coors Banquet just remains on fire as it gains distribution, both in the on-premise and the off-premise. So I would say that those are the 3 brands that are having the most positive impact for us in the on-premise. Tracey, do you want to get into margins a little bit more?
Yes, Gavin. If I look, from a margin point of view, we don't specifically give gross margin guidance. But just to note, our underlying gross margin percentage has improved in each of the last 2 years. But a couple of things as we look at 2025. So we've spoken about the top line. In terms of the COGS, we do have the deleverage headwind driven by the contract brewing, which we've discussed. And we also have higher premiumization, which drives higher COGS across our business units. We have spoken about the Midwest Premium. And although we do have productivity improvements and cost savings, these are more than offset by the deleverage and premiumization as well as the Midwest Premium.
Our next question comes from Rob Ottenstein with Evercore ISI.
Great. So Gavin, a pretty pessimistic view on second half volumes for the industry. And I'm assuming that July was pretty bad. And this is in the face of, I think, easier comps given how bad the weather was last year. So I guess what I'd love you to help us think through, assuming that does play out the way you're guiding to, what are the impacts on the industry and how can the industry address that? So are you starting to see pressure, for instance, on shelf space, not for you specifically, but for the beer industry as a whole as retailers start to look at the fall and shelf set changes and into next year and how you may be combating that? Any impact on, not just yours but industry brewery footprint, the potential for some sort of consolidation of volumes and maybe doing a reverse, doing more contract brewing instead of letting contracts go, actually maybe bring more in to keep brewery utilization going given the high fixed costs of breweries and dependence on volume. So just love to get your thoughts on industry action, your reaction to these unprecedented volume declines.
Thanks, Rob. There were several questions in there, so let me address them. From a comparison standpoint, July had easier comparisons, but the rest of the year did not. There was poor weather, and the industry faced challenges in July last year, making those comparisons softer. However, moving forward, the situation has improved significantly since August. Comparisons will actually become tougher, and we've incorporated that into our planning. Regarding shelf space, we experienced a notable increase in 2024 for both the spring and fall of 2023, and we managed to retain those gains. By the end of 2024, we were significantly higher than in 2023. In the spring of this year, we maintained those shelf gains, particularly benefitting Banquet, which showed strong double-digit growth. We do not expect significant activity for the fall of 2025 based on current observations, as retailers have made shelf adjustments primarily in the flavor and craft segments rather than in traditional beer.
As for our brewery capacity, it varies by season, with full utilization in the summer and less during shoulder periods. Removing Pabst from our system has been very beneficial, eliminating a lot of complexity and freeing up summer capacity. This change contributed to our decision to bring Peroni entirely onshore, which we have completed. We see significant potential for Peroni, and we’re beginning to see that benefit in the second quarter. I've often said that Peroni has the potential to be as large as its European competitors, and we have gained meaningful market share against them in the second quarter as our plans have been implemented. This change has also allowed us to consolidate our operations by closing some smaller breweries. Additionally, it facilitated the integration of Yuengling into our business, enabling production at a couple of breweries and paving the way for further expansion with Yuengling when the opportunity arises. Overall, we're satisfied with our brewery footprint, and I believe that covers all of Rob's points. Tracey.
Our next question comes from Eric Serotta with Morgan Stanley.
I wanted to first ask you, Gavin, about recent market share trends. It seems the off-premise trends have weakened compared to your largest competitor. While you've mentioned improvements in on-premise trends, are there any changes to your marketing or go-to-market strategies that you're considering due to what appears to be a strong competitor resurgence, especially concerning two of their main brands? Additionally, Tracey, could you clarify the incentive compensation reversal amount? Was that entirely in the second quarter? Regarding free cash flow, how much of the gap between the earnings decline and free cash flow reiteration is due to cash taxes and working capital? Lastly, will the working capital benefits reverse next year, or are they sustainable? I know there's a lot to address, but thank you.
Thank you, Eric. There’s a lot to cover. From a share perspective, our total Molson Coors share trends in the U.S. have shown improvement each quarter since the third quarter of last year. In Q3, we were down about 100 basis points. By Q4, that decline was about 70, with Q1 seeing a reduction of about 60, and Q2 remaining similar. If we look deeper into where we are losing share, a significant part is coming from flavors and seltzer, which has been the main contributor to that decline. We are seeing some improvements with Topo Chico, but not enough to make up for the losses in Simply and Vizzy. Approximately a third of the decline can also be attributed to our economy portfolio. On a positive note, our key brands, Miller High Life and Keystone Light, are performing better, alongside the total number of brands we have in that segment. Speaking of our core share, we have retained 180 basis points of the share gained in 2022, which is significant.
Banquet continues to excel, increasing by another 20 basis points in Q2 and remaining one of the fastest-growing major beer brands in the U.S., with growth in all 50 states and Washington D.C. during the first half of the year. We're pleased with Coors Banquet’s performance. Looking ahead to Q3, we're concentrating on our Miller Lite 50th anniversary campaign and will leverage our NFL alliances. You will see our presence across all channels, with increased media efforts, especially in the Great Lakes region. We plan to execute on Coors Light through our College programming in collaboration with ESPN GameDay and maintain momentum for Coors Banquet with our Start Your Legacy program. In terms of our above premium brands, I've discussed Peroni and Madri. We are striving to alter the trajectory of the Blue Moon brand and have observed early signs of improvement in on-premise performance, particularly with our innovations like Blue Moon non-alcoholic.
Additionally, we are focusing on boosting Blue Moon, Simply, and Topo Chico in convenience stores, which is a major priority for us. We remain deeply committed to turning it around. That wraps it up for me. Is there anything else you would like to discuss?
Yes. So Eric, common incentive compensation, look, we accrued for incentive comp throughout the year. And then based on our adjusted outlook for our guidance. We have reversed a large portion of what we had accrued in the first half of the year. In terms of the free cash flow, look, the cash tax benefits that we've got as well as the working capital improvements largely offset the profit shortfall. And then if you recall, when we had our Q1, we did cut our capital spend by about $100 million. So that gives us the free cash flow of around $1.3 billion, plus or minus 10%, as we have guided to.
Our next question comes from Peter Galbo with Bank of America.
Gavin and Tracey, thanks for all the detail in the deck, very helpful. Tracey, I just wanted to go back maybe to Filippo's question, particularly around the volume deleverage piece. I think it was about a 300 basis point impact in the first half. And I know that you kind of gave some high-level commentary on where it would be for the year. But was just hoping to unpack that a bit more as we think about the second half and the year specifically, how we should think about the volume deleverage impact?
Yes. So in terms of our outlook for the year, what we had said is that STWs outpaced the STRs by about 800,000 hectoliters in the first half of the year. We always plan to ship to consumption. And so there's going to be about 300,000 hectoliters or so that we will reverse in the second half of the year. Maybe in Q3, because last year, for the first half, we did ship more than the retail by about 1.1 million hectoliters. So the difference between that is about 300,000 hectoliters, which we expect to reverse. And then, yes, because we plan on shipping to consumption, we expect most of that to converge by the end of the year, but mainly in Q3.
Our next question comes from Bill Kirk with ROTH Capital Partners.
So my question, since pre-COVID since 2019, you have more market share than you did. Your earnings per share are much better than they were, but the stock price doesn't really reflect those improvements. So I guess the question is, if you aren't getting credit for market share gains, the profit growth in your current categories, so something needs to strategically change? And then when underlying COGS per hectoliter are up mid-single-digit or more, why only take a 1% to 2% price increase?
Thanks, Bill. Regarding the first part of your question, we believe our business is a very attractive investment at these levels and we are demonstrating that belief by buying back shares well ahead of the authorized Board program. I'm very pleased with our acquisition of the U.S. business of Fever-Tree and the integration is progressing well, with our volumes exceeding our expectations. Our distributors are excited about it, and it enhances our presence in the non-alcohol space while potentially benefiting our other non-alcohol activities. As for pricing, we consider each market and brand individually. We take into account various factors including input costs and consumer behavior towards price increases. We have a strong revenue management program and will continue to act in the best interest of our brands in each market.
Our next question comes from Robert Moskow with TD Cowen.
Thanks for the question. In the past couple of years, the productivity gains at Molson Coors have been substantial and helped offset a lot of the negative impact from volume deleverage, but now it looks like the volume deleverage is accelerating and you've had to call down your guidance. Tracey and Gavin, at what point do you have to take another look at your asset footprint both in terms of manufacturing and distribution? And with volume declining at this pace, will you have to take another look at that and maybe make more reductions?
Thanks, Robert. I mean, look, from a capacity point of view, we're pleased with our brewery footprint. We have obviously really strong utilization from a capacity point of view in the summer months. We've removed contract brewing from our system, which is why we've had that headwind and have had the headwind all year. That obviously starts to tail off as we head into the back half of this year. But not much more I can say than what I said earlier, Robert. I mean, removing Pabst from our system has proven to be very helpful. It's allowed us to take a lot of complexity out of our system. It's allowed us to change things from a shift configuration point of view, from a line point of view, and from a temporary labor point of view, it's overall from a brewery footprint point of view been very positive for us. And it's allowed us to bring Peroni in, which, as I said, is growing very nicely, and we hope to have that brand as a big brand in the future. And it's allowed us to support our Yuengling partnership, where we've got a very successful launch in Illinois this year. So we're pleased with our brewery footprint, I guess as a summary.
Our next question comes from Michael Lavery with Piper Sandler.
I just wanted to come back to the guidance update and the EPS bridge. The Midwest Premium has gotten a lot of attention, but as you've called out the math, it's maybe 1 to 2 points of the 10 or 13-point cut to the EPS growth outlook. And you've got some stepped-up buybacks as well. What are the missing pieces, I guess? And if you've said what's new is Midwest Premium, the category trends and then your share expectations, is it just all of that and the operating deleverage that we've covered a bit? Or is there other inflation we should have our eye on as well? Or you mentioned the interest expense change, that's also quite modest. I mean, help us maybe figure out if there's any other moving parts here? Or if just the top line flow-through is that significant?
Michael, yes. We anticipate spending similar amounts on marketing during our peak summer selling season as we did last year. Additionally, our earnings per share is affected by fluctuations in currency. As the dollar weakens, we can expect a positive impact. Tax also plays a role, and we have maintained our effective tax rate guidance at its previous level. These factors could influence our earnings per share. While marketing expenditures were down in the second quarter, we expect them to increase in the third quarter due to the timing of our commercial plans and in comparison to lower spending from the previous year.
Our next question comes from Lauren Lieberman with Barclays.
So I know you talked about the softer U.S. share performance in the release. And I was just curious to kind of talk a little bit more about that. Given the competitive premium light space these days. And like, are there any specific regions in the U.S. where you're seeing underperformance? And I know you said the guidance for the second half assumes the share trends kind of are consistent. You just commented on our marketing. But I was curious about plans to defend share in the second half and beyond? Like is there a point where you'd consider addressing pricing? Is it a matter of more marketing? Or is the view more like don't overspend into a soft market backdrop?
Yes. Thanks, Lauren. Look, I mean, we're obviously very thoughtful about how we spend our marketing, and we turn it over quite carefully. But certainly, we're seeing really pleasing momentum in a number of our brands without wishing to repeat myself too much, right? I mean we're seeing strong momentum behind Banquet, Peroni. And we've got our non-alc portfolio coming in, Fever-Tree, we're spending more money behind it. Madri in our other markets has performed very well. So notwithstanding the current overall macro environment, which we, as I said, believe is cyclical. We're going to continue to invest behind our brands so that when the tide turns, they're in the best position that they can be. I talked a little earlier on about some of the areas that we're focusing in on our core brands, not only Banquet, but also Miller Lite and Coors Light, and we're going to continue to support those. But you can be assured that we turn over every marketing and sales dollar carefully for effectiveness before we spend it.
Our next question comes from Carlos Laboy with HSBC.
Yes, good morning, everyone. Can you come back, please, to the cash offsets that you mentioned earlier? You mentioned tax benefit. That was another one. If you could expand on both of those, please, it would be helpful.
Yes. For our free cash flow, we've received some cash tax benefits this year as well as some improvements in working capital. This has allowed us to maintain our free cash flow guidance at approximately $1.3 billion, plus or minus 10%. These are the two specific items we wanted to highlight.
The biggest driver there, obviously, is the benefit coming out of capital deductibility from One Big Beautiful Bill point of view.
Our next question comes from Nadine Sarwat with Bernstein.
I know we've talked a lot about the U.S. So I'd actually like to turn attention to EMEA and APAC. Your financial volumes were down close to 8%. And I know you called out weakness in a number of the markets. But could you provide perhaps some additional color by region? So how is the U.K. business doing versus your other markets? And then how do you view this segment performing over the remainder of this year specifically?
Thank you, Nadine. The market in the U.K. is still facing a decline across both channels. However, we have noticed some improvement in our category performance recently, partly due to the shift of Easter from the first quarter to the second quarter. As you know, the weather in the U.K. has been quite favorable. We anticipate that figures will show a greater decline once we receive the June data, as we will be comparing against a significant football tournament from last year. Competition remains strong, and even though we've increased promotional frequency for our largest brand in the off-premise sector, we face challenges due to some competitors pricing their products 20% lower on the shelf, which has impacted our main brand. Our Madri volume growth is still strong, showing mid-single-digit increases in the second quarter, and we will continue to support these brands accordingly. Looking at our Central and Eastern European business, the beer industry overall remains sluggish, largely due to a decline in consumer confidence that started toward the end of 2024, following a period of improvement.
This decline is influenced by well-known global political issues as well as local social and economic tensions. We've seen an uptick in promotional activity across most markets, coupled with some tough customer negotiations that have now been resolved. These factors have affected our volume performance in the first half of the year, but we remain optimistic about growth potential in Central and Eastern Europe. We're investing in our national power brands and supporting recent launches in the above-premium space, such as Madri in Bulgaria last year and Romania this year, both of which are performing well. We've also launched Coors in Hungary, which is doing well, and our innovation in the beyond beer category, like Aspall's Pip & Wild cider in Serbia, Bulgaria, Montenegro, and Croatia, is also showing promise, although it's early days. Our premiumization efforts in the EMEA and APAC regions are proving successful, reflected in the mix benefits we observed in APAC during the second quarter, which contributed almost 490 basis points of positive mix. So, Nadine, that's an overview of our European business.
Our next question comes from Gerald Pascarelli with Needham.
I have a question about capital allocation. Given the decline in volumes, if industry and your own volumes continue to stay low for an extended period, how do you see this impacting your long-term business strategy? Do you think larger-scale mergers and acquisitions or more aggressive bolt-on acquisitions might be necessary to pivot your portfolio toward more appealing subsectors in beverages, such as increasing nonalcoholic options or focusing on above-premium brands? I’m interested in your perspective on how M&A fits into your capital allocation strategy.
Thanks, Gerald. Look, from an M&A point of view, I think we've been very clear about how the string of pearls approach has worked for us. And the early days when we still had somewhat of a challenged balance sheet with a higher leverage ratio. Those pearls were relatively small. As we've put ourselves in a really strong position from a balance sheet point of view, I'm very proud of the work that the team has done to get the balance sheet where it is after the last 4 or 5 years. That has allowed us to look at slightly bigger pearls. And certainly, the one we did this year with Fever-Tree is very strongly supportive of our overall strategy. And there's a much bigger pearl than we perhaps would have considered 5 years ago when you add everything up from a working capital point of view and a distribution point of view, and our investment in Fever-Tree. That number was well north of $100 million. So we remain committed to our string of pearls approach. Obviously, beyond that, I'm not going to comment on any M&A, but I'm very pleased with the progress that we've made with Fever-Tree so far.
Our next question comes from Kevin Grundy with BNP Paribas.
Great. Thanks. Good morning, everyone. I was hoping maybe to get an update on the CEO search process, given Gavin's plans to retire by year-end. Gavin, of course, you will be missed. But any update there just in terms of where that process stands? Any comments on internal versus external candidates, attributes that the Board is looking for? And perhaps maybe how that's evolved a bit given the demands of the current environment. So any comments that you can offer to folks, I think, would be appreciated. Thank you very much.
Thanks, Kevin. I appreciate the kind words. The process is well underway, and the Board has made significant progress. They are navigating this thoughtfully, especially considering my planned retirement by the end of the year. The Board is focused on both relevant business leadership experience and cultural fit. I am very proud of the culture we've built here at Molson Coors; it's very special. It's common for companies of our size to consider both internal and external candidates for a CEO position, and that is what our Board is currently doing. They continue to support our long-term strategy. I would expect any new CEO to put their own stamp on the company. That's the update, Kevin.
Thank you. Those are all the questions we have today. And so I'll hand the call back over to Gavin for closing remarks.
Thank you, operator. Appreciate that. Appreciate all the questions. I'd like to close by thanking our Molson Coors team and all of our over 16,000 employees, our incredible partners and our best-in-class distributor network. I'm confident that together we can navigate this challenging environment and certainly emerge stronger with this team behind us. So thanks for your time today.
Thank you, everyone, for joining us today. This concludes our call, and you may now disconnect your lines.