Chief Financial Officer at Molson Coors Beverage
Thank you, Gavin, and hello, everyone. We posted a strong second quarter, which exceeded expectations. We continue to make real progress executing our revitalization plan, and we are starting to see the results in our operating performance. As Gavin noted, we continue to premiumize our brands and strengthen our core business, and our improved financial flexibility has enabled us to invest in our business while continuing to delever our balance sheet and to reinstate a dividend. Now let me take you through our quarterly results in more detail and provide an update on our outlook. Consolidated net sales revenue increased 13.7% in constant currency, delivering 98% of second quarter 2019 levels despite continuing to operate with varying degrees of on-premise restrictions. Consolidated financial volumes improved 5.5%, outpacing brand volume growth of 3.1%, driven by higher Europe volumes and favorable U.S. domestic shipments. Top line performance benefited from on-premise reopenings in the quarter for most of our major markets as well as strong global net pricing, positive channel mix and historic favorable brand mix levels in the U.S. as we continue to premiumize our portfolio. Net sales per hectoliter on a brand volume basis increased 5% in constant currency, driven by pricing growth, coupled with positive brand and channel mix, partially offset by geographic mix given the strong growth in Europe and Latin America. This top line growth was somewhat offset by inflationary pressures, which impacted most consumer product companies as well as increased marketing investments as we continue to execute our revitalization plan.
Underlying cost per hectoliter increased 8% on a constant currency basis, driven by cost inflation including higher freight and packaging costs. However, with robust hedging and cost savings programs, we have been able to significantly mitigate much of the inflationary pressure. MG&A in the quarter increased 25.3% on a constant currency basis as we cycle timing shifts and targeted reductions to marketing spend in the prior year period due to the coronavirus pandemic. As planned, we significantly increased marketing investments in the quarter, putting strong commercial pressure behind our key innovations and core brands. Underlying EBITDA decreased 1.3% on a constant currency basis but increased compared to 2019 second quarter level. Underlying free cash flow was $558.2 million for the first half of the year, a decrease of $238.2 million from the prior year period. This decrease was wholly driven by lapping roughly $500 million in benefit in the prior year related to tax deferrals due to governmental programs and was partially offset by favorable working capital and lower capital spend. Capital expenditures paid were $212 million for the first half of the year as we continue to invest behind capability programs such as our previously announced Golden Brewery modernization project in our new Montreal brewery.
Capital expenditures were lower in the first half of the year compared to the prior year, primarily due to project timing. Now let's look at our results by business unit. In North America, the on-premise channel accounted for approximately 13% of our net sales revenue in the quarter compared to approximately 16% in the same period in 2019. In North America, on-premise reopenings vary by market. In the U.S., our largest market, we continue to see progressive reopenings during the quarter and attained over 80% of 2019 levels as of quarter end. In Latin America, restrictions continue to ease, while in Canada, significant restrictions continue throughout the quarter with on-premise volume about 1/4 of pre-pandemic levels. North America net sales revenue was up 8.3% in constant currency, driven by strong net pricing growth, positive brand mix in the U.S., favorable U.S. shipment timing and higher Latin America volumes. Of note, U.S. net sales revenue exceeded the second quarter 2019 levels. In the U.S., domestic shipment volumes increased 1.2%, outpacing brand volume declines of 4% as we focus on rebuilding inventory following the first quarter supply disruption. The brand volume declines were entirely due to economy, which was down double digits as we deprioritized certain noncore SKUs. Our best premium portfolio was up double digits and our premium brands were up low single digits. In fact, our U.S. above premium brand volumes reached a record-high portion of our portfolio compared to any prior quarter since the creation of the MillerCoors joint venture in 2008. Canada brand volumes declined 5.1%, while Latin America brand volumes experienced triple digit growth, driven by strong core brand performance.
Net sales per hectoliter on a brand volume basis increased 4.7% in constant currency, with pricing growth delivered across all geographies. The U.S. increased 6.9%, driven by net pricing and historic levels of positive brand mix. While the intention decline in economy was a contributor, about half of this record mix performance was due to growth in above premium, led by innovation brands, including Vizzy, Topo Chico Hard Seltzer and ZOA. These positive factors were partially offset by negative geographic mix resulting from the restricted trading environment in the higher-revenue Canadian business and strong growth in Latin America. Underlying cost per hectoliter increased 8.5%, driven by inflation, including higher transportation and packaging materials costs and mix impacts from premiumization. Underlying MG&A increased 24.2% due to higher marketing investments. We increased marketing investment behind core innovation brands and we increased media spending behind our iconic core brands, Coors Light and Miller Lite. Our U.S. media spend approached 2019 levels while local tactical spend was somewhat constrained due to on-premise restrictions, which eased throughout the quarter. North America underlying EBITDA decreased 10.7% in constant currency as higher gross profit was more than offset by higher planned MG&A. Europe net sales revenue was up 52.3% in constant currency driven by volume increases and positive channel, geographic and brand mix due to on-premise progressive reopening, most meaningfully in the U.K., given the reduced on-premise restrictions compared to nearly full lockdowns in the prior year quarter.
Above premium brand volumes reached a record-high portion of our Europe portfolio. Europe financial volumes increased 17.8% and brand volumes increased 15.4%, driven by a significant increase in U.K. on-premise volumes. Net sales per hectoliter on a brand volume basis increased 16.6%, driven by favorable channel, geographic and brand mix, particularly from our higher-margin, on-premise-focused U.K. business as well as positive pricing. Underlying EBITDA increased 189% in constant currency, driven by gross margin impact of higher volumes and favorable channel, geographic and brand mix as a result of gradual on-premise reopening, partially offset by higher MG&A expense. Turning to the balance sheet. As of June 30, 2021, we had lowered our net debt-to-underlying EBITDA ratio to 3.35 times and reduced our net debt to $6.9 billion, down from 3.5 times and $7.5 billion, respectively, as of December 31, 2020. We ended the second quarter with strong borrowing capacity with no outstanding balance on our $1.5 billion U.S. credit facility. Turning to our financial outlook. We are again reaffirming our 2021 annual guidance originally provided on February 11, 2021. While we are certainly in a better place than we were a year ago, it pays reminding that uncertainty as it pertains to the coronavirus and its variants remains to varying degrees by market.
Now I'll provide some underlying expectations to provide some additional context for the balance of the year. We expect to deliver mid-single-digit net sales revenue growth for the full year on a constant currency basis. Building off the strong shipment growth in the U.S. in the second quarter, we continue to work aggressively to build inventories to more optimal levels. In the U.S., we expect on-premise trends to continue to improve as we lap restrictions in the prior year period. In Canada, we are seeing gradual on-premise reopenings varying by province, which should provide positive channel mix. In Europe, the U.K. should benefit from this full on-premise reopening July 19. However, the comparison is more difficult than it was for the second quarter given the on-premise was largely opened for the full third quarter of 2020. Our guidance also anticipates continued strength in our above premium portfolio, particularly hard seltzers. Also, we expect continued solid progress against our previously discussed emerging growth three year revenue goal of $1 billion against which we are tracking ahead of plan. We continue to anticipate underlying EBITDA to be roughly flat compared to 2020 as top line growth is expected to be offset by continued cost inflationary headwinds, but more significantly from increased investments to deliver against our revitalization plan. We intend to increase marketing investments to build on the strength of our core brands and support successful innovation.
As a result, we expect significant year-on-year increases in marketing investments over the balance of the year and most notably in the third quarter. We expect third quarter marketing investments to be higher than the second quarter of 2021 and also higher than the third quarter of 2019 as we continue to ramp up supply following the disruptions in the first quarter. Obviously, this will have an impact on our bottom line, particularly in the third quarter, but this will strengthen the future of our brands. Also, as a reminder, in 2020, our working capital benefited from the deferral of approximately $130 million in tax payments from various government-sponsored payment deferral programs related to the coronavirus pandemic. We currently anticipate the majority to be paid this year as they become due. Moving to capital allocation. We continue to prioritize investing in our business to drive top line growth and efficiencies, reducing debt and returning cash to shareholders. First, we plan to continue to prudently invest in brewery modernization and production capacity and capabilities to support new innovations and growth initiatives, improve efficiencies and advance towards our sustainability goal. Second, we have a strong desire to maintain and, in time, upgrade our investment-grade rating. As such, we expect to continue to pay down debt and reaffirm our target net debt to underlying EBITDA ratio to be approximately 3.25 times by the end of 2021 and below three times by the end of 2022.
Demonstrating our commitment to this goal, on July 15, we announced that we had repaid in full the $1 billion 2.1% senior notes that were maturing that day using a combination of commercial paper and cash on hand. And third and also as announced on July 15, our Board of Directors determined to reinstate a quarterly dividend on our Class A and Class B common shares and declared a dividend -- a quarterly dividend of $0.34 per share. The Board made the decision to reinstate a dividend at a level that they believe is sustainable and gives room for future increases as business performance improves. We are proud of our operational performance in the quarter, which underscores successful execution against our revitalization plan. We are excited about the future of Molson Coors as we drive towards our goal of long-term sustainable revenue and underlying EBITDA growth.
And with that, we look forward to taking your questions. Operator?