Tracey Joubert
Chief Financial Officer at Molson Coors Beverage
Thank you, Gavin, and hello, everyone. For the third quarter, we delivered another quarter of net sales revenue and underlying pretax growth. We continue to invest in our business. We reduced net debt, and we returned cash to shareholders. Despite the challenging global macro environment and overall industry softness, beer consumers remained resilient in our three major markets in the third quarter, while we saw softness in our Central and Eastern European business. And as expected, global inflationary pressures continue to be a headwind for our bottom line performance.
Taking this all into account, we are maintaining our 2022 key financial guidance but we do now expect underlying pretax income growth on a constant currency basis to be at the lower end of our high single-digit range. While we discuss our business performance on a constant currency basis, it is also relevant to consider the currency impact of the strong U.S. dollar, which was a meaningful headwind to the reported results in the quarter. On a reported basis, our third quarter net sales revenue was negatively impacted by $109 million, and our underlying pretax income was negatively impacted by $21 million.
Before we discuss our quarterly performance, I wanted to provide some context on our on-premise recovery. Our third quarter on-premise has nearly fully recovered to 2019 total revenue level. However, in looking at the map on Slide 8, we can see there are variations by markets. In the U.S., the on-premise reached 94% of 2019 total revenues, the highest since the pandemic. While in Canada, where on-premise restrictions have been more severe, the on-premise continued to improve on a sequential basis but has not returned to 2019 levels. However, in the U.K., similar to the second quarter, the on-premise well exceeded 2019 total revenues.
Now I'll take you through our quarterly performance and our outlook. Turning to Slide 9. Consolidated net sales revenue grew 7.9%, driven by strong global net pricing and favorable sales mix. Consolidated financial volumes were essentially flat. America shipments were down due to the continued impact of the Quebec labor strike, which was resolved in June, while financial volumes were higher in EMEA and APAC on increased U.K. brand volumes.
Net sales per hectoliter on a brand volume basis increased 9.2%, driven by strong global net pricing and positive sales mix across both business units. As expected, inflationary pressures continued to be a headwind in the quarter. As you can see on Slide 10, underlying COGS per hectoliter to increase 12%. The two biggest drivers were cost inflation and mix. Cost inflation comprised more than two-thirds of the increase and included higher input materials, transportation and energy costs. Our mix drove roughly 350 basis points of the increase and was due to premiumization, which is a negative in terms of COGS, but a positive in terms of gross margin.
While inflation remains a significant headwind, we continue to judicially deploy our multiple levers, including pricing, premiumization and our hedging and cost savings programs to help mitigate the impact. As it pertains to our hedging program, it is worth reminding that our program is longer term in nature as we hedge commodities over one to three years, and we operate within guardrails and take a more opportunistic rather than programmatic approach.
The purpose of the hedging program is to smooth out the impact of big swings in commodity prices. So in a situation like the third quarter, where we saw some sequential easing of certain commodities, it will take time to see that impact on the P&L. Further, we are exposed to other costs that cannot be hedged, such as freight, but also material conversion costs and third-party manufactured contracts that extend over periods of time, which can be material contributors to our COGS.
MG&A increased 3.5% as lower marketing spend was more than offset by higher G&A. Marketing investment decreased as we cycled higher spend in the prior year period when investments exceeded third quarter 2019 levels. We continue to provide strong commercial support behind our core brands and new innovations at the U.S. launch of Simply Spiked.
G&A increased due to increased people-related costs, including travel and entertainment expenses and legal costs as well as cycling the Yuengling company equity income, which was included in G&A in the prior year period.
Now let's take a look at our results by our business units. Turning to Slide 11. The Americas net sales revenue increased 7.4%, benefiting from net pricing growth and positive brand mix, partially offset by lower financial volumes. Americas financial volumes decreased 1% driven by Canada, while U.S. domestic shipments increased 1.4%. Americas brand volumes decreased 1.5%, driven by Quebec and U.S. brand volume declines of 0.9%, which approximated industry performance. U.S. brand volume trends were driven by high single-digit declines in the economy brands largely due to the SKU rationalization program and to a lesser degree, by low single-digit declines in premium brands. Conversely, the U.S. above premium portfolio continued to grow strongly, up low double digits for the quarter. Brand volumes in Latin America also increased. Net sales per hectoliter on a brand volume basis increased 7.5% due to net pricing growth and favorable brand mix. And as you can see in the slide, strong pricing and premiumization in our two largest markets in the Americas, the U.S. and Canada drove that performance.
On the cost side, Americas underlying COGS per hectoliter increased 11.4%. As with our consolidated results, the primary drivers were inflation including higher materials, energy and transportation costs as well as mix impacts from premiumization. MG&A decreased 1.4%, driven by lower marketing spend. As I mentioned, we strongly supported the national launch of Simply Spiked, but overall marketing spend declined due to lower U.S. national marketing and sales control spend related to alliance and media phasing. G&A increased as a result of the same drivers discussed for the consolidated G&A I mentioned earlier. As a result, Americas underlying pretax income increased 10.5%.
Turning to EMEA and APAC on Slide 12. Net sales revenue increased 9.6% driven by higher financial volumes, net pricing growth and favorable mix. Financial volumes grew 2% due to higher brand volumes in Western Europe, where the demand remains strong, along with higher factor brand volumes. This was partially offset by brand volume declines due to Russia war in Ukraine and weakened demand due to inflationary pressures in Central and Eastern Europe. EMEA and APAC net sales per hectoliter on a brand volume basis was up 14.3% driven by positive net pricing as well as favorable sales mix driven by the strength in our above premium brands like Madri and positive geographic mix.
On the cost side, underlying COGS per hectoliter increased 13.8%. Similar to the Americas, the drivers with cost inflation and mix from premiumization. MG&A increased 21.7% as we accelerated market investments behind our national champion and above premium brands, especially in the U.K. supporting Carling, Madri and Staropramen and fueling on-premise strength. G&A also increased as we cycled lower relative spending in the prior year. As a result of these higher costs, EMEA and APAC, underlying pretax income declined 38.9%.
Turning to Slide 13. Our underlying free cash flow was $597 million for the first nine months of the year, a decrease of $336 million from the same period last year. This was primarily due to higher capital expenditures and lower underlying pretax income, partially offset by the prior year net repayment of various tax payment deferral programs related to the pandemic and lower cash taxes.
Our capital allocation priorities remain to invest in our business to drive top line growth and efficiencies, reduce net debt and to return cash to shareholders. Capital expenditures paid were $531 million for the first nine months of the year, an increase of $167 million from the prior year period, and we're focused on expanding our production capacity and capabilities program. which support improved efficiencies and help us deliver our sustainability goals.
Capital expenditure levels remain in line with our expectations of approximating pre-pandemic annual levels. We ended the quarter with net debt of $6.1 billion, down nearly $500 million since December 31, 2021, and a trailing 12-month net debt to underlying EBITDA ratio of 3.13 times, approaching our target of below 3 times by the end of 2022. We ended the quarter with $125 million of commercial paper outstanding. In this rising interest rate environment, it's notable that substantially all our debt is at fixed rates.
In terms of returning cash to shareholders during the third quarter, we paid a quarterly cash dividend of $0.38 per share to holders of Class A and B common stockholders. And we paid approximately $12.6 million for 250,000 shares under our share repurchase program, which is essentially an anti-dilution program for annual employee equity grant.
Now let's discuss our outlook, which you can see on Slide 14. And while we start year-over-year growth rates in constant currency, please note that current exchange rates will generate a headwind in our fourth quarter reported results at similar relative levels to what we experienced in the third quarter due to the strength of the U.S. dollar.
For 2022, we are reaffirming our guidance of mid single-digit net sales revenue growth high single-digit underlying pretax income growth and underlying free cash flow of $1 billion, plus or minus 10%. However, given increased inflationary cost pressures and weakening demand in Central and Eastern Europe, we expect underlying pretax income growth to be at the lower end of the range. Based on our annual guidance, this would imply for the fourth quarter on a constant currency basis, underlying pretax income growth in the range of approximately 45% to 60%, and we expect to be at the lower end of the range.
Now let me walk through some of the assumptions that will help you understand why we have reaffirmed our guidance. Gavin has already discussed some of the top line drivers like our full pricing in the U.S., easing comparisons in the U.K. and Canada and the World Cup tournament. Also, in the fourth quarter, we have fully lapped the shipment headwind from our economy SKU rationalization. These drivers are partially offset by weakened demand in Central and Eastern Europe. From a COGS point of view, we continue to expect margins to be impacted by inflationary pressures particularly with acceleration in commodity costs in EMEA and APAC. But offsetting some of the inflation costs, we continue to expect our cost savings program to be weighted to the fourth quarter. And we now expect lower depreciation, which is due to the timing of capital projects and the impact of significant foreign exchange movements.
Turning to marketing. We continue to expect overall spend to be down in the fourth quarter compared to the prior year period. We are comfortable with our planned level of marketing investment, which is comparing against the prior year period when marketing investment exceeded 2019 levels. Looking out to 2023, while we are not prepared to provide any guidance, we remain committed to putting the right commercial pressure behind our core brands and key innovations, including our first official Super Bowl ad in more than 30 years.
In terms of our other guidance metrics, we continue to expect net interest expense of $265 million, plus or minus 5%. However, we are lowering our underlying effective tax rate to a range of 21% to 22% from our prior guidance range of 22% to 24%. And we are lowering our underlying depreciation and amortization to $700 million plus or minus 5% from our previous guidance of $750 million, plus or minus 5% for the reasons I just mentioned.
So in closing, we put up another quarter of growth and did so in a challenging macro environment. While these remain dynamic and uncertain times, under our revitalization plan, we have built our business to manage through challenges with strong brands across all our segments and greatly enhanced financial and operational flexibility, we remain confident in our ability to navigate near-term macro challenges while investing in the business and staying the course towards our goal of long-term sustainable top and bottom line growth.
And with that, we look forward to answering your questions. Operator?